We’ve talked before about Bitcoin. Bitcoin is the best-known cryptocurrencies. (You can learn more about it by clicking here.)

I thought I’d go a little bit more into how it works.

Traditional currency is created by mints, Bitcoins are created by mining. Not in the ground, of course, but by computers running math equations. How does this all work and why?

Decentralized Currency

Bitcoin is intended to be a decentralized alternative to traditional financial institutions. When you use a bank and want to send or receive money from another person, the money first goes through the bank. The bank keeps the record of deposits and withdrawals from your account in their ledger.

Bitcoin uses a decentralized ledger that’s updated by users. Users who wish to participate in updating the ledger, do it by allowing their computer to guess a random number generated by the Bitcoin mining program. If your computer guesses correctly, it gets to write the next page of the ledger and you earn bitcoins for your work.

Your data is sent to the whole network and other computers will validate it. The computers that validate your part of the solution will update their copies of the Bitcoin transaction ledger. Then the system generates Bitcoins and gives them to you as payment for your computer’s efforts in solving the math problem.

Specialized Hardware

Back in 2009 when Bitcoin mining started, you could do it on a regular PC’s CPU. Over time, specialized hardware like the ASIC miner was introduced to handle the computations.

While you may have heard stories of people making millions from Bitcoin in its early days, it’s not so easy now.

The majority of mining these days is done by professional mining ‘farms’ or mining ‘pools’ where groups of miners join together to combine their mining power.