Bitcoin Trading Company Fundamentals Explained
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Chances are you hear 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 away.
Far less glamorous but equally uncertain, bitcoin mining is performed by high-powered computers that 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 solve these complex mathematics problems on the bitcoin networkthey create new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational math issues, bitcoin miners create 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 works in greater detail, lets begin with a procedure thats just a little 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 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, for example, that transaction is processed by a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, these companies affirm that transactions are not fraudulent, and that's one reason that your debit or credit 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 servers throughout the world known as miners. This network of computers plays the identical function as the Federal Reserve, Visa, and Mastercard, but using a few 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 methods, and physical receipts. Bitcoin miners achieve the exact same effect without these institutions by clumping transactions together in blocks and adding them to a public document 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 those transactions are true. (More on the wonder of how this happens in a second) In particular, bitcoin miners be sure that bitcoin are not being duplicated, a unique quirk of digital currencies known as double-spending.
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Once you spend $20 at the shop, that bill is in the clerks hands. With digital currency, however, it's a different story. .
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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, nevertheless, verifying every one 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's 12.5, and sometime in the center of 2020 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 valuable over time but also more costly for miners to produce.
Here's the catch. In order resource to get bitcoin miners to really earn bitcoin from verifying transactions, two things have to happen. First, they need to verify 1 megabyte (MB) value of transactions, which can theoretically be as small as 1 transaction but are more often several thousand, depending on how much data each transaction stores.