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Chances are you listen to the term 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 off.

Far less glamorous but equally uncertain, bitcoin mining is done by high-powered computers which solve complex computational math problems (read: so complex 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 end result of bitcoin mining is twofold. First, 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 issues, bitcoin miners make the bitcoin payment network trustworthy and protected, 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 detail, lets begin with a process thats just a little 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. Feeling because the U.S. dollar is backed with 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 digital payments using the U.S. buck are backed with a central authority. When you make an online purchase using your debit card or charge card, for instance, that transaction is processed by a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, these companies verify that transactions are not fraudulent, which is one reason your credit or debit card may be suspended while traveling. .

Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is backed by millions of computers throughout the world called miners. This network of computers performs the same function as the Federal Reserve, Visa, and Mastercard, but using 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 call that a transaction. Transactions generated in-store and online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the same effect without these institutions by clumping transactions together in blocks and adding them into a public record known as the blockchain. .

When bitcoin miners put in a new block of transactions to the blockchain, part of the job is to make sure that these transactions are accurate. (More on the wonder of how this happens in a second.) In specific, bitcoin miners be sure bitcoin are not being duplicated, a unique quirk of digital currencies called double-spending.

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Once you spend $20 at the shop, that bill is in the clerks hands. With electronic currency, however, it's a different story. .

Digital information can be reproduced relatively easily, so with bitcoin and other electronic currencies, there is a threat that a spender can make copy of the bitcoin and send it to another party while still holding onto the original. Let's return to printed currency for a moment and say someone attempted to duplicate their $20 bill in order to spend the original and the counterfeit in a supermarket store.

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If the numbers were identical, then the clerk could 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 add 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's 12.5, and sometime in the middle of 2020 it will halve to 6.25. .

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

Here's 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 look at this site of transactions, which can technically be as little as 1 transaction but are more often several thousand, depending on how much data each transaction stores.