Menu IconA vertical stack of three butterfly bitcoin spaced horizontal lines. Bitcoins are a bit like the Internet. Or, rather, the Internet as it was in the mid ’90s: something strange, coming out of geekdom into mainstream perception, greeted by puzzlement over how it works, why it works and why anyone would think it’s useful.
Even more intriguing is that the creator of Bitcoins is unknown, pseudonymous like Banksy. And maybe like installation artist JSG Boggs producing a work exploring the meaning of money. A common analogy for Bitcoins is gold: like gold, they have value only because people want them, the supply is limited, more Bitcoins are created only by ‘mining’ for them and the difficulty in mining grows as they are mined. But rather than being stored in underground vaults Bitcoins are simply entries in a notional ledger held across many computers around the world. The actual mining of Bitcoins is by a purely mathematical process.
But as they were found it got harder to find the larger ones. Bitcoin ‘hash’ algorithm is applied to the data. The size of the bounty reduces as Bitcoins around the world are mined. The difficulty of the search is also increased so that it becomes computationally more difficult to find a match.
These two effects combine to reduce over time the rate at which Bitcoins are produced and mimic the production rate of a commodity like gold. At some point new Bitcoins will not be produced and the only incentive for miners will be transaction fees. With the difficulty and bounty settings it becomes possible to calculate the expected rate of Bitcoin production. 44 in electricity for each Bitcoin mined.