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

Far less glamorous but equally uncertain, bitcoin mining is performed by high-definition computers which solve complex computational science issues (read: so complex they cannot be solved by hand). The fortune 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 end result of bitcoin mining is twofold. First, when computers solve these intricate math problems on the bitcoin network, they create new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational math problems, bitcoin miners make the bitcoin payment network dependable and secure, by verifying its transaction information. .

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

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Consumers tend to anticipate printed currencies, at least in the United States. Thats because the U.S. dollar is backed with a central bank known as the Federal Reserve. In addition to a host of additional responsibilities, the Federal Reserve regulates 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 purchase using your debit card or credit card, by way of instance, that transaction is processed by a payment processing company like Mastercard or Visa. In addition to recording your transaction history, these companies verify that transactions are not fraudulent, and that's one reason that your debit or credit card could be suspended while traveling. .

Bitcoin, on the other hand, is not controlled by a central authority. Instead, bitcoin is endorsed by millions of computers across the world known as miners. This network of check my reference computers performs the same function as the Federal Reserve, Visa, and Mastercard, but with a couple of key differences. Like the Federal Reserve, Visa, and Mastercard, bitcoin miners record transactions and assess their accuracy.

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When someone makes a purchase or sale using bitcoin, we call a transaction. Transactions generated in-store and online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the exact same effect without these institutions by clumping transactions together in blocks and adding them into a public record called the blockchain. .

When bitcoin miners put in a new block of transactions to the blockchain, a part of their job is to ensure that these transactions are accurate. (More on go to my blog the magic of the way this happens in a second.) In specific, bitcoin miners make sure that bitcoin are not being duplicated, a unique quirk of electronic currencies known as double-spending.

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Once you spend $20 in the store, that invoice is in the clerks hands. With electronic currency, nevertheless, it's a different story. .

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

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If the numbers were identical, the clerk would know the money had been replicated. This analogy is very 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, nevertheless, verifying each of these transactions can be a lot of work for miners, which gets at one other key difference between bitcoin miners and the Federal Reserve, Mastercard, or Visa. As compensation for their efforts, miners are awarded bitcoin whenever they add a new block of transactions to the blockchain.

In 2009, it was 50. In 2013, it had been 25, in the time of writing it is 12.5, and sometime in the middle 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 valuable over time but also more costly for miners to produce.

Here's the catch. In order to get bitcoin miners to really earn bitcoin from verifying transactions, two things must happen. First, they must verify 1 megabyte (MB) value of transactions, which can theoretically be as little as 1 transaction but are far more often a few thousand, depending on how much data each transaction shops.