Parallels Between Bitcoin Mining and Gold Mining
Like gold, Bitcoin is scarce, and requires substantial amounts of resources for production, or mining. Bitcoin miners must use up electricity, Bitcoin mining hardware, and physical space, which often requires miners to pay rent. These expenses ensure that Bitcoin is only mined if it is valued highly enough; if the utility received from newly mined coins is lower than the utility foregone in paying the expenses to mine coins, then there would be no Bitcoin mining. Furthermore, as Bitcoin mining progresses, the difficulty involved in producing new blocks increases. Once Bitcoin mining got started though, and Bitcoin attained an exchange rate with the dollar, one feature of the protocol’s mining mechanism departed Bitcoin mining from its gold mining roots. This feature, combined with an unavoidable economic characteristic of the currency, constitutes the supply-side problem present in Bitcoin price volatility.
