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Chances are you hear the phrase bitcoin mining and your mind begins to wander to the Western fantasy of pickaxes, soil, and striking it rich. As it turns out, that analogy isnt too far away.

Far less glamorous but equally uncertain, bitcoin mining is performed by high-definition computers which solve complex computational math problems (read: so complex that they cannot be solved by hand). The luck and work required by a computer to solve one of those problems is the equivalent of a miner striking gold in the ground while digging in a sandbox.

The result of bitcoin mining is twofold. First, when computers resolve these complex math problems on the bitcoin network, they produce new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational math issues, bitcoin miners make the bitcoin payment network trustworthy and secure, by verifying its transaction information. .

Theres a fantastic chance all that only made so much sense. In order to explain how bitcoin mining functions in greater detail, lets begin with a procedure thats just a tiny bit closer to home: the regulation of printed currency.

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Consumers tend to trust printed currencies, at least in the United States. Thats because the U.S. dollar is backed by a central bank known as the Federal Reserve. In addition to a bunch of additional responsibilities, the Federal Reserve modulates the production of new money and prosecutes the use of counterfeit currency. .

Even electronic payments using the U.S. dollar are backed with a central authority. When you make an online order using your debit card or credit card, by way of example, that transaction is processed by means of a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, these companies affirm that transactions are not fraudulent, which is one reason that your credit or debit card could be suspended while traveling. .

Bitcoin, on the other hand, is not regulated by a central see this page authority. Instead, bitcoin is backed by millions of servers throughout the world called miners. This network of computers performs the identical function as the Federal Reserve, important source Visa, and Mastercard, but with a few important differences. Like the Federal Reserve, Visa, and Mastercard, bitcoin miners record transactions and check their accuracy.

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When someone makes a purchase or purchase using bitcoin, we predict a transaction. Transactions made in-store and online are documented by banks, point-of-sale methods, and physical receipts. Bitcoin miners achieve the exact same effect with no institutions by clumping transactions together in blocks and adding them to a public document known as the blockchain. .

When bitcoin miners add a new block of transactions to the blockchain, a part of their job is to ensure that those transactions are accurate. (More on the wonder of the way this happens in a second.) In particular, bitcoin miners make sure that bitcoin are not being reproduced, a unique quirk of electronic currencies called double-spending.

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Once you spend $20 in the shop, that invoice is in the clerks hands. With digital currency, nevertheless, it is a different story. .

Digital information can be replicated relatively easily, so with bitcoin and other digital currencies, there's a threat that a spender can make copy of the bitcoin and send it to another party whilst holding onto the original. Let us return to printed currency for a moment and say someone attempted to replicate their $20 bill in order to spend the original and the counterfeit at a grocery store.

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If the numbers were identical, then the clerk would know the money had been duplicated. This analogy is similar to what a bitcoin miner does when they confirm new transactions. .

With as many as 600,000 purchases and sales occurring in a single day, however, verifying each of these transactions can be a lot of work for miners, which gets at one other crucial difference between bitcoin miners and the Federal Reserve, Mastercard, or Visa. As compensation for their efforts, miners are given bitcoin whenever they include a new block of transactions to the blockchain.

In 2009, it was 50. In 2013, it was 25, at the time of writing it's 12.5, and sometime in the center of 2020 it will halve to 6.25. .

At this speed of halving, the entire number of bitcoin in circulation will approach a limit of 21 million, making the currency more scarce and precious over time but also more costly for miners to produce.

Here is the catch. In order to get bitcoin miners to really earn bitcoin from verifying transactions, two things have to occur. First, they must confirm 1 megabyte (MB) worth of transactions, which can theoretically be as small as 1 transaction but are far more often a few thousand, depending on how much information each transaction stores.