And processing transactions. And increasing security.
It seems a pointless waste of electricity and human effort, but justifiable with the current bitcoin prices.
More information better written at [0] and [1], but they'd be able to reverse their own transactions (and double spend), and also stop any other transactions being confirmed.
So essentially these miners are making it more difficult for anybody to attack the blockchain, thus they're providing security.
[0] http://bitcoin.stackexchange.com/questions/658/what-can-an-a... [1] https://en.bitcoin.it/wiki/Weaknesses#Attacker_has_a_lot_of_...
Of course, this only works if they're (or someone else is) not big enough to control more than 50% of the hash rate (not sure how much they would have to grow to do that)
Only for the Bitcoin network, which is like saying that putting a fence and armed guards around a plot of industrial wasteland is inherently good because it increases security.
The fear at the time was that the Germans could do a stealth smash-and-grab on New York and steal all of our gold. So they moved it all across a mountain range to the middle of an Army base (in fact, they used to train tank crews there). Even in peace-time, the prospect of being chased by the entire US military across a thousand miles of US territory is sufficiently daunting that the depository itself doesn't need to be that impressive.
• All the employees, regulators and effort put into the auditing and compliance needed to make fractional reserve lending slightly less risky
• The leakage and losses due to carding fraud which goes unfixed because banks have little incentive to fix it
• The mind-blowing resource misallocations that result from misguided but well intentioned economic interventions, like the Spanish housing estates that were built then knocked down without ever being occupied ...
and so on.
Yes, Bitcoin mining is pretty wasteful today. It's a misallocation of resources caused by monetary inflation - the fact that you get to print money by solving SHA256 preimage puzzles diverts lots of energy and effort into doing so even though it makes no real sense. But Satoshi knew inflation caused harmful resource misallocation which is why he scheduled it to halve every four years (some inflation at the start is needed to actually issue the currency into existence, of course).
Now think about the wastefulness of mining, but on a massively larger scale, and without any end in sight. That's other currencies.
Inflation on the other hand, in the long term, guarantees bifurcation of rich and poor (wealth disparity). The reason for this is fairly simple. The poor spend between 100 and 110 percent of their disposable income, and they spend it on consumption. The rich, on the other hand, invest at least 10 percent of their disposable income in some kind of asset, either fixed assets or financial assets. Assets can then be used as collateral against loans which are used to purchase more assets. Inflation erodes the real value of the loan i.e. the nominal principal of the loan does not inflate, but it's real value deflates with inflation. Thus, inflation is a virtuous circle of asset ownership, which gives access to credit, which both increases assets owned, and whose liability decreases with inflation.
To put it another way, never ending inflation is a transfer mechanism of wealth from the poor to the rich. Once the poor realise this, they demand a political solution. The political solution inevitably involves increasing taxes on the middle class (the rich don't pay taxes), to pay for social welfare programs (i.e. free money). In this way, inflation not only transfers wealth from the poor to the rich, it also indirectly destroys the middle class by crushing them with a punitive tax burden to placate the poor.
If you have savings and investments, inflation puts pressure on you to make them perform, otherwise you are losing money; it works like a capital tax in that regard. You just can't sit on it since money can't really be saved without someone else borrowing it (production and consumption have to even out at the end of the day!). So no, the rich don't really get richer off inflation. They aren't brorowing money from the poor at any rate.
If you think of a person as having a balance sheet, with assets (property, shares, bonds, cash) and liabilities (loans), and a profit and loss of revenues (salary, dividends, coupons, rents, i.e cashflows) and expenses (food, shelter, clothing, transport, interest etc), then inflation:
* increases the value of your assets => asset prices rise with inflation
* decreases your liabilities => loan balances stay constant in nominal terms, but in real terms the liability is decreasing.
* increases your income => wages and salaries rise with inflation
* increases your expenses => the price of consumables increases with inflation.
So, ideally, in a high inflation environment, you want to hold as many assets as you can afford, levered as much as possible, with a high income, and low expenses.
So the rich purchase assets with debt. Inflation pushes the price of assets up, and the real value of the debt down. I agree that the assets you purchase should generate a cashflow to cover the financing drag. Inflation also increases dividends, rents and coupons.
Because the poor have expenses (outgoings) equal to or greater than income (wages, salary), price inflation erodes their disposable income, and price inflation is elastic, but wages are sticky, so the poor are always playing catchup, and in the interim, the rich are buying up their assets with cheap debt.
The rich are both lending and borrowing money; again, who do you think they are borrowing money from? Who are they buying the assets from? Again, it is not the poor, unless you are suggesting they are accumulating previously non-existing or non-utilized assets?
The rich are not borrowing from each other. Banks create money endogenously. They are buying existing assets from each other, and they are also buying new assets as they are created. Without inflation, asset purchases would look less attractive on a cash return basis, so inflation does serve that purpose. However, persistent inflation is forcing the market to be investors when they may want to save or spend.