bitcoin may be the next big thing in finance, but it can be difficult for most people to understand how it works. There is a whole lot of maths and numbers involved, things which normally make a lot of people run in fear. Well, its one of the most complex parts of Bitcoin, but it is also the most critical to its success.
As you know, Bitcoin is a digital currency. Currencies need checks and balances, validation and verification. Normally central governments and banks are the ones who perform these tasks, making their currencies difficult to forge while also keeping track of them.
The big difference with Bitcoin is that it is decentralized. If there is no central government regulating it, then how do we know that the transactions are accurate?
How do we know that person A has sent 1 bitcoin to person B?
How do we stop person A from also sending that bitcoin to person C?
The answer is mining.
What is Bitcoin Mining? In Some Ways, Bitcoin Is Like Gold
One of the most common analogies that people use for Bitcoin is that its like mining gold. Just like the precious metal, there is only a limited amount (there will only ever be 21 million bitcoin) and the more that you take out, the more difficult and resource intensive it is to find. Apart from that, Bitcoin actually works quite differently and its actually quite genius once you can get your head around it. One of the major differences is that mining doesnt necessarily create the bitcoin. Bitcoin is given to miners as a reward for validating the previous transactions. So how do they do it?
Bitcoin mining requires a computer and a special program. Miners will use this program and a lot of computer resources to compete with other miners in solving complicated mathematical problems. About every ten minutes, they will try to solve a block that has the latest transaction data in it, using cryptographic hash functions.