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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, soil, and striking it rich. As it turns out, that analogy isnt too far away.

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

The result of bitcoin mining is twofold. To begin with, when computers resolve these complex math issues 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 protected, by verifying its transaction information. .

Theres a fantastic chance all that only made so much sense. In order to explain how bitcoin mining works in detail, lets begin with a process thats 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 called the Federal Reserve. In addition to a bunch of other responsibilities, the Federal Reserve modulates the production of new money and prosecutes the use of counterfeit currency. .

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

Bitcoin, on the other hand, is not controlled by a central authority. Instead, bitcoin is backed by millions of computers across the world known as miners. This network of computers performs the same function as the Federal Reserve, Visa, and Mastercard, but with a few important 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 that a transaction. Transactions made in-store and online are documented by banks, point-of-sale systems, and bodily receipts. Bitcoin miners achieve the exact same effect with no institutions by clumping transactions together in cubes and adding them to a public document called the blockchain. .

When bitcoin miners put in a new block of transactions to the blockchain, part of the job is to ensure that these transactions are accurate. (More on 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 at 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 digital currencies, there's a threat that a spender can make backup of the bitcoin and send it to another party whilst holding onto the original. Let's return to printed currency for a moment and say someone attempted to replicate their $20 bill in order to spend both the original and the counterfeit in a supermarket store.

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If the numbers were identical, the clerk could know the money had been replicated. This analogy is similar to what a bitcoin miner does when they verify new transactions. .

With as many as 600,000 purchases and sales occurring in a single day, nevertheless, verifying every one of those transactions can be a great deal 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 awarded bitcoin whenever they include a new block of transactions to the blockchain.

In 2009, it had been 50. In 2013, it was 25, in the time of writing it is 12.5, and sometime in the middle of 2020 my sources it will halve to 6.25. .

At this rate of halving, the total number of bitcoin in circulation will approach a limit of 21 million, making the currency more scarce and precious over time but also more expensive for miners to make.

Here's the catch. In order for bitcoin miners to really earn bitcoin from verifying transactions, two things have to occur. First, they need to verify 1 megabyte (MB) worth 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 stores.