[bbcbasic]

Mining requires expending computing power to solve a puzzle. The puzzle is to get the hash of a bunch of transactions below a certain number. The first to solve it receives a number of bitcoins.

Mining is based on a network agreed difficulty level. So as more miners participate and get better hardware the difficulty of the puzzle increases (by lowering the bar).

Currently it requires dedicated custom-built hardware (built solely for mining bitcoins) to make any kind of money mining Bitcoin. Even then you have little chance of winning the reward - so you normally would join a mining pool to pool computing power and share rewards with other miners.

The mining acts as a proof of work. It helps solves the problem that in a peer-peer system you can't trust anyone, because in a democratic system an attacker can run up any number of nodes they like at little cost. However with mining this is not possible, such nodes will not be trusted.

This is a very simplified view of things and there are more complexities but it gives you an idea.

[avni000]

This is really helpful - thanks. A follow up question about volatility - is it true that volatility only really exists when trying to convert to currencies like the dollar or pound but doesn't exist if you remain within Bitcoin? Wouldn't that imply that it's like gold where it's good to buy as much as you can when the price in dollars drops but that once you own Bitcoin the price of goods in Bitcoin would remain constant?

[logn]

The BTC price of goods only remains constant if sellers decide so. And they generally have a supply chain and labor that is heavily impacted by exchange rates. Plus, neither consumers or producers are ignorant of exchange rates, so there aren't going to be products marked at 1 BTC forever if BTC appreciates/depreciates.

But there's nothing within BTC itself that's volatile. The currency is slowly being inflated to the target 21 MM coins.