Bitcoin Forum

Could BitCoin ever be backed by Gold or some other commodity in the following fashion? And would it be desirable to do this?
Assume for the sake of argument that all 21 million coins were in circulation as of just today.  Suppose some rich reputable entity (Bill Gates or the Pope) bought up all bitcoins at market price (29 cents) for $6,090,000.   Some amount of gold is purchased, placed in a vault in Switzerland, and the coins are sold back to the public for some amount of money which the market will bear in such a manner that Bill or the Pope take no loss or gain.  Does that back the currency so that it is tied to the price of gold, similar to the way that everyone seems to want the US to have stayed on the gold standard?

Clearly I have not thought this through, but is there way to later back a fiat currency, or must it be done from the outset?  Further, is it desirable to do this?

Gold will be backed by bitcoins someday.

If you are rich and don't mind losing lots of gold, sure :)

No, it's not really desirable to do this.

Bitcoin is the commodity itself. It is not a contract. It doesn't need to be backed by anything the same way gold didn't need to be backed by anything.

Okay, funny.  And true.  I don't think Gold has any more inherent value than Bitcoins.  In fact, they may figure out how to make gold one day, but will never figure out how to make more bitcoins, so I do understand.  Let me tell you the genesis of the thought, though.  Wikileaks.  Some people want to give money to Wikileaks right now.  They could simply buy bitcoins at an exchange, using dollars or credit card, or whatever.  Wikileaks can then instantly cash the bitcoins back in whatever currency.  Suppose then the US government closes down the ability to trade in bitcoins for US dollars, or to purchase pre-paid Visa cards, etc.  The value of the bitcoin left to being the 15 people who accept it.  So unless Julian Assange wants a new VPN, or to look at porn, buy domain or web service (as I type this I realize bitcoins are probably pretty good for Julian :-) then Wikileaks is stuck.  If the currency is backed by gold, someone will pay regarless of how the authorities in the US and Europe try to regulate/terminate a competing internet currency.  Look what they did to e-gold.  But they can't shut down bitcoin . . . there's no one to put in jail.  All a government can do is try then to eliminate the backing of the gold in the Swiss bank (or whatever) to destroy the currency.  That's more or less why I thought about backing the currency.

I think that too and I whish I had said it clearer on this forum.

This is a misunderstanding.  The current market price for one bitcoin is around 0.29 USD.  If you want more than about 100 000, you are already paying 0.5 per bitcoin.  If Bill Gates and the Pope want my last bitcoin, they will have to part with their last dollar, and I will have my own state in the middle of Rome.  What you suggest is impossible.

But, of course, anyone could back Bitcoin with gold by offering a gram of gold per bitcoin, or something.  Guaranteed.  In that case one Bitcoin will be backed by one gram of gold, but not tied to it.  The value of one bitcoin will be higher, since bitcoins are easier to use.

Also, how is bitcoin a commodity?  Gold can be used for fillings, you can eat oranges, you can drink coffee.  Making something hard to get does not make it a commodity even though that is essential.  I only have so many nosehairs, but that does not make them of value to anyone.  Nor does my asking people to use my nosehairs as currency and a few people using them make them a commodity.  P2P currency has value due to what it can do and the setup of bitcoin is a great concept and happens to be working.  However in a currency with nothing tangible backing it, when faith in the currency fails, people stop accepting it.  When faith in a commodity backed currency fails, at least you can get your amount of coffee, oranges, gold or whatever.  What can I get with my bitcoin if people stop accepting it?  Right now, to me, the biggest thing the bitcoin has going for it right now is that I can get US Dollars (another essentially valueless money) for my bitcoin.  Towards that end, I mine it 24/7.  And I'm glad the profit is very very marginal, or I would not have faith in it myself.  I do have faith in the bitcoin.  But when governments begin to crack down, or the dollar begins to falter, I wish I was holding some currency that is backed by something I, or someone else, can eat, drink or fill my teeth with.  An alcohol based commodity would be great to back the bitcoin.

I have a bitcoin, I'm not selling it at 29 cents. How is anyone going to get them all for 29 cents each?

And this really has nothing to do with me thinking that the market price is really low right now. If coins went to a billion dollars each I'd still have no reason to part with my last one since I'd have more than a trillion dollars already.

You can back stickers with platinum if you want, but 'backing' is only as good as the word of the backer.

sturle, I don't understand the response.  Why could any person with a few million dollars not buy all of the bitcoins in existance?  Is your last bitcoin worth more than Bill Gates can offer you?  Are you really going to hold out for a state in Rome?  Would you not settle for a new XBOX 360 for that last bitcoin?  How about a lapdance?  I do not know whether it is impossible to back a currency after it has been issued, as you say it is.  That is, after all, my question.  The posters on here may realize the value of a bitcoin.  I do.  I think it is a great currency for quick, easy, secure anonymous transactions.  But try explaining to any of your friends how you will loan them bitcoins or give them as a gift and see how fast people tell you to shove it.  Tell them they can cash them in for dollars and they'll snatch them right back.  Tell them they can be arrested by the US Government if they spend them anywhere and they will be hesitant.  But if they may be able to trade them for gold somewhere, they may just keep them somewhere on their computer for a rainy day, regardless of what Uncle Sam tells them they can and cannot do.

FreeMoney, I understand the hyperbole.  But you would sell your bitcoin for a Billion Dollars.  You would likely sell a bitcoin for $1000, probably even $100.  You seem to imply that the last bitcoin is worth some outrageous sum of money.  Or that the price will rise astronomically if someone tries to buy them all.  Why?  Regardless, whether someone buys all of the bitcoins is not the issue.  One would not even need to buy them all to back them by a contract for gold.  True, the backing is only as good as the contract.  That is why even if you completely trusted e-gold, it still doesn't matter because the US Government destroyed the contractual relationship.  So I picked a Swiss Bank for my example, but it could be any entity that people trust to deliver an amount of a given commodity like coffee for one bitcoin.  It is the difference between a currency backed by something, and a currency like the dollar backed by nothing.

Cornering a market is not that easy.  See the Hunt brother's story.


As far as backing bitcoin by gold, or gold by bitcoin, it's not a good idea at all.

Basically this would mean a turn back to a centralised monetary system.  Bitcoin advocates don't want that.  Neither do gold ones.

I was going to say exactly what grondilu said. Trying to make such a "backing" introduces centralization. The backing institution could be taken over by governments. It doesn't really add safety, and I don't see any economic incentive for such institution to do such backing.

Okay, I just got 100 sand dollars off of my beach that each have a really unique pattern.  In fact, they just washed in with a rare tide that happens every 100,000 years and I think I got them all.  The local kids will sell you lemonade for 1 sand dollar a cup.  I bought five cups, so the kids have five of them.  My maid really likes the shells and she cleaned my house for 5 of them.  I'm not going to tell you what my girlfriend did for the other 40, but she want's more and there just aren't any.  Oh, wait, here's the other 50.  Does anyone want to buy them.  They are not currency.  They ARE the commodity because I had to work real hard to find them and they shine up really nicely.  You can get lemonade, your dishes done, and god knows what my slut girlfriend will do for 50 shells, given what she did for 40 shells.  We are all out here in California, so all of the 3 services are available locally.  Any takers?  I heard the kids want a billion dollars for the last shell though.

grondilu and cavaden, good answer.  And food for thought.  But is a currency that is backed by something worse than one backed by nothing, simply because someone can take the backing away? 

This feeling people have that money should be useful for something else has already been discussed here in other topics.

Money doesn't need to be useful for anything else, it just need to be good money. Actually, insisting on this is like insisting on refusing one of the main advantages of capitalism, that is resource specialization. Why waste gold as money when you have better suited stuff to be used as money (bitcoins ;)) and gold is the only metal that suits some other uses? Resource specialization is fundamental to economic growth. While people keep using gold as money/store of value, those other uses only gold can accomplish will be much more expensive than they needed to be.

Can you transfer your sand dollars via internet ?  Can you make sure there will never be more than a certain amount ?  Can you divide them up to hundreds of millions times ?  Are they all indistinctable, do they have all the same value ?

Your sand dollars kind of look like diamonds.  Diamonds are precious.  But they are not money.

In other words, sure, there is always some trust there that someone is going to deliver, the bank or entity holding the commodity is not going to get robbed or explode.  But pick the safest alternative reasonably possible and go with MAYBE getting your gold or coffee for your bitcoin in the worst case scenario, rather than getting nothing if 15 people stop accepting bitcoins.  As to the Hunter Brothers and silver, yes, I remember that.  But it is one hell of alot easier to buy up all of the bitcoins that all the gold or silver in the world.  Simply put, I think bitcoins would have wider acceptance if someone gave something for them that people want.  Right now, people are not quoting the price of bitcoins in terms of VPN service or Web Hosting (or the other 3 or four tangible things you can actually buy).  They quote the price in US Dollars.  Fine, great.  But the US is poised to kill that in a hot second just like e-gold if people start using bitcoins.  They won't like the anonymity and they will say bitcoins supports terrorism.  When the US does that, and MTGox says Bitcons are worth x days of VPN service, instead of 30 US cents, the bitcoin will be dead.  If it is backed by a promise of a credible entity for a tangible good that can be sold somewhere, the bitcoin will live on regardless of what the US does, unless the us can get to the holder of the goods in some way.

Yes people can offer gold in return for coins or the reverse. Is this all you mean? It's been done on this forum, you don't need to be rich.

I'm a buyer on the day the government says bitcoin supports terror for sure. That's going to be a huge pop.

Yes, you two have made my point that we are talking about money.  I was responding, tongue in cheek, the the guy who said bitcoins ARE the commodity to which bitcoins (the money) is linked.  Nonsense.  As you say, bitcoins are money.  Money is only as good as the promise backing the money.  If some guy in the Czech Republic promises me VPN or Web Hosting, and that's it, well, that's not much of a promise.  If the Pope promises me a bar of gold in writing for my bitcoins, they will have that value as long as the Pope can be trusted.  And, no you cannot trade shells on the internet.  If I did not see the great promise of bitcoins as money I would not even be here.  I like the concept and as more people accept bitcoins, the more people will use them.  But they could die if that does not happen.  If you back them with a commodity somehow (regarless of my lame example) people will buy and use them until the backing dies.

Your "credible entity" is nothing but a normal market agent.  There's no reason why one of them should decide of a correct price of gold in bitcoin.

I am currently selling physical gold for bitcoin.  Check out on the marketplace forum.  So I am your "credible" agent.  And yet, I have not decided any particular price :  I sell my gold in an auction process, with no starting price.

If you hesitate to buy a currency that is backed only by true market forces, just diversify and keep some gold.  As I do.

Now that Wikileaks cannot accept payments via PayPal or Visa/Mastercard, Wikileaks could start accepting bitcoins tomorrow.  And that day the government says bitcoin supports terror would likely be tomorrow or the day after.  Then the US goverment would shut this site down and run the hosting out of the US.  Maybe Europe would join.  Your bitcoins would buy Web Hosting in Cuba, North Korea, and a few African nations.

Actually, I may buy from you.  But what do you do with the bitcoins?  Do you trade them for dollars, services, or hold bitcoins?  Are you not concerned that the US will do to bitcoins what they did to e-gold if bitcoins becomes as successful as e-gold?  With e-gold, at least people have shares in the gold, even though they can no longer use e-gold as money.  If the US governement says you are currency trading (you are) and you need to "know your customer" and you are breaking the law, you will likely stop offering gold for bitcoins. This is the crux of my original question.  The likelyhood the US will do anything to shut down bitcoins is directly in proportion to its success.  You are a credible agent, I'm sure, but you will likely close up shop if you are in the US and faced with federal prison time.  A credible agent outside of the US, like a Swiss Bank, might not be coerced into rescinding on a promise to uphold the contract and provide a fixed amount of gold for one bitcoin (which is, incidentally, completely different that buying and selling gold with bitcoins.)

It is not that different.  Think more.  It is really similar.

Anyway hopefully I won't be the only gold seller.   Being resilient to government coercion is not just a matter of geographic location, but also a matter of number of people.

The government is already in war against people selling drug.  I doubt it would start an other war against people selling gold.

After having said all of that, you all probably think I am against bitcoins or have no faith.  On the contrary, I am leaving now to speed up the processor on my 5850 video card to make a few more coins over time.  I think the utility of bitcoins is the greatest thing to come along since sliced bread.  No argument there.  But when I tell people about it as a currency they almost laugh.  "You run your computer 24 hours a day and pay a larger electric bill for what??? What can you buy???  Oh, so kind of like Microsoft points then, huh?"  Then I tell them you can get cash and they ask where they can buy a fast video card and get started.  When you take cash out of the equation, no one needs what bitcoins can buy.  If, in addition to being money, a bitcoin was a certificate to be exchanged in a Swiss bank for 1 grain of gold, then the bitcoin would have true value in addition to it's unique value as a currency.  Later.  And thanks for the replies.

Read this.  http://en.wikipedia.org/wiki/E-gold  The US Dollar does not like competition.

Why? Bitcoins are a commodity. A commodity doesn't need to be something physical... often stocks, debt bonds, fiat currencies and other financial assets are treated as commodities. The main requirement I see to treat something as a commodity is that different units of this something have the same value (like, different 1g bars of pure gold have the same value, as different 1 dollar bills). This way you can talk about a global price for the commodity itself, like the price of gold, the price of Google stocks etc...

Bitcoins are pretty much like gold. Not backed by anything, and yet quite good to be used as money/store of value due to their inherent properties.


No, that's not what makes good money. Again, gold is not backed by anything and it's quite a good thing to be used as money.

What makes something good money are attributes like:

• Limited supply
• Easy to transfer, stock and protect
• High divisibility
• Of course, it has to be a commodity as I defined above

"First you're ridiculed, then you're ignored, then you're violently opposed, and then you win."

We're clearly in the first step.

+1

There are some interesting things you can buy with bitcoins already, but yes, mostly you can't do much with them. But hey, come on, the whole project has barely two years! Most entrepreneurs here are geeks investing their own time, with no financial support from big investors. Give some time... new services are popping up... maybe someday something big will come out, and might push it over the mainstream.

About wikileaks, they are already aware about bitcoins, but they've (wisely) chosen not to use it because they know the project is yet too young for their needs.

I think what we need the most right now are more exchanges, in different currencies. That would make bitcoin a cheap way to transfer money overseas, what's already something big.

I think there is a problem with the standard meaning of the word 'backed'. The term originally meant that the value of a currency was pegged to the value of some amount of another commodity (usually gold or silver). This is seen when references toward the 'innate' problem of centralization is mentioned. Of course if this meaning of "backed" is used, then yes centralization would be necessary. However it seems that what is really the reason behind the idea of backing is this worry that the only commodity that bitcoin might be traded for is USD. However the fact that a currency can be traded for gold does not actually peg its value to gold. Likewise, if bitcoins could only be traded for USD, its value is not pegged to the USD (though it would probably be limited in value because of its lack of flexibility).

Bitcoins are a commodity; just like USD, gold, silver, oranges, etc... After all, a commodity is merely something that is used in trade or consumption. In particular, bitcoins are an intermediary commodity as their value lies in the ability of the bitcoins to be traded for things of useful value. Because of this fact, bitcoins value is best served not by artificially pegging its value to some other commodity, but by allowing it to be traded 'freely' in the most flexible manner possible. The more liquid bitcoins become, the more value they will hold. In this sense, bitcoins hold very little value (shown by the face that each bitcoin is worth only .3 USD). Until bitcoins become widely accepted as an internet currency, it will continue to hold value only in the same way an investment property hold value.

Hahahahaha I'm really lovin' this forum ;)

This is not entirely true. Bitcoins also have an inherent intelectual value, which is a solution to a complex mathematical problem.
Of course, that value is probably not very big, but still.

Also, bitcoins behave like gold when you want to obtain them. You need to mine them using energy & resources, and the more people is out there mining, the less probability exists you will be the lucky one. Exactly the same as gold: the less gold there is on earth, the more difficult mining becomes, as the "easiest" gold is always mined first and the more difficult one is mined later requiring more resources. Bitcoin is like scarce bullion in many ways...

It's not a matter of "mining difficulty", it's just a matter of statistics.

The more gold you extract from the ground, the less gold there is left there.  So the likelyhood of finding some gold decrease exponentially.  It's the same for any substance hidden in an other.

Put 100 black pieces of paper in a bag with a billion white ones.  Try extracting them one by one, and you'll see an exponential decrease of your production of blacks.

This exponential rule was one of the many things that I liked in the bitcoin protocol.  I'm thankful to Satoshi to have implemented it.  It's perfect to mimic a commodity extraction process.

Yes, this is also partially what i meant.
The less gold is in the ground, the more difficult it is to mine some gold out of it, as it requires more search, more work, more resources.

Seems geometric to me  :P

I don't see ways neither to bitcoin be backed by gold nor the contrary

There is no real reason for BitCoin to be backed by gold, or gold backed by BitCoin.  But, exchange between gold and BitCoin is important (and is a de-facto backing so long as there is a viable, liquid and relatively stable gold:BTC exchange market...which of course depends on people's willingness to hold gold and BTC).  Should it ever come to pass that the dollar (or other currencies) are banned from being exchanged for BitCoin, gold could be used as an intermediate step in the exchange of currency for BTC.  It is possible and legal to exchange gold and dollars anonymously in the US.  Establishing a network of people willing to exchange physical gold (and silver btw) for BTC is probably an important thing.

Total 21 million bitcoins amount is the value of Earth and Moon, including everything that is on them.

Exactly! Let's think about a golden meteorite. What will happen? :)

Sorry to disappoint you, but something like a meteorite which mostly consists of gold, is very very unlikely to ever happen.

LLOOOOLL

yeah right I want a golden meteorite falling in my garden, and also a super good looking woman knocking at my door, requesting to be my slave.

Like this will ever happen lol

Well, the slave woman actually could happen. It would probably be a prank though.

EDIT:
Or, if bitcoin becomes #1 World Currency and you become filthy filthy filthy filthy rich, then this could happen for real :P

Oh this reminds me of a calculation I made few months ago.

In order to back gold by bitcoins, or bitcoins by gold, we'd have to set up the price of gold to 8 BTC per kilogram.

And I think I was wrong about that, it's rather 8 kg of gold for 1 bitcoin.

When a currency pool is too small to have any liquidity to determine effectively its value, I think currency pegging (to a major currency or a basket of currencies) is a more applicable modern concept than "backing" by any arbitrary precocious precious commodity.
http://en.wikipedia.org/wiki/Fixed_exchange_rate (http://en.wikipedia.org/wiki/Fixed_exchange_rate)

In the case of BTC, this is all very academic. However, the above makes no sense.

"Precocious" commodity? Commodities cannot act, they are lumps of stuff. These lumps may have value to others in various ways, the value placed by those folks changing from moment to moment.

Who's precocious? That'd be the central bankers behind the issuance of all the major fiat currencies. They may or may not like how this market or that market is acting, and so step in with their heavy dull cudgel of open-market operations to lopsidedly inject more fiat currency into the marketplace, to the loss of all who are not first to get the new money.

Who are central-bankers to decide what the relative value of a thing is? Don't like how the market is acting? The market price is an emergent phenomenon arrived at by the sum total of free and open transactions done by the participants, who wanted to do those transactions at the time, or they would not have taken place.

So what you're really saying is that you don't trust the people who are participating in establishing a commodity's price by transacting in the market for that commodity. You would rather have an expert, the central planner at the central bank, observe and then by his fiat decide what is best for everyone.

As to liquidity, the market solves this (that is to say, in the market this is solved)^[1] by volatility. The only correct price is the one printed on the tape. And then only for that instant. If there are too few transactions taking place to keep this stable, then there is opportunity for speculators who believe for their own reasons that the price doesn't reflect the true value in the transaction. The more extreme the swing, the more speculation is attracted until there is enough transacting happening to dampen out the price oscillations.

Lack of liquidity/volatility could be a sign of uncertainty about conditions affecting the transaction, or a lack of interest in the thing being transacted. These are phenomena emergent out of the business actually taking place, and who are you to tell (via a peg) the market's participants what to do?

BTC's value has roughly tracked its popularity and notability. There was a very short spike toward $0.50 USD some time ago, when its popularity and notability were much lower. Lack of liquidity drove that. What happened? Speculators noticed. Most of them (as it happened) decided that the price on the tape couldn't possibly be efficiently reflecting the true worth of BTC at that time, and so just as quickly as it popped up due to lack of available BTC supply, supply soon rushed into the marketplace and cleared out the demand that created the spike.

The market is never wrong, because the market price is merely a report of instantaneous conditions.

^[1] Economists are wont to talk about the market as a thing unto itself, capable of its own actions and independent behaviors. This is a mistake. However, phrasing the market in that context is convenient shorthand when what you mean to discuss is really the summation of actions taken by the participants in a market.

I think he meant "precious" as in precious metal commodity.

Yeah, I know how physics works. But it is still possible. :)

Isn't the purpose of Bitcoin what it can do for society as a whole, freeing them / us from from predation, Bitcoins are not the most important issue, shops goods and services are the important points.
If people hoard bitcoin in the hope of gains, then there will be no money, so someone will just invent another currency  that allows people to do what they want, live free from being fleeced, if hoarders end up in the position of being able to do that, another currency will come along that sets people / society free.
People have a right to prosperity, to profit from investment, a little hoarding will always go on, but if every coin mined is simply hoarded then there will be no bitcoin economy, so no shops, goods and services and the masses will not join in.
What they want to know is can I buy food and water, clothes for my family in such a way that it's simple quick and easy so they can spend time with their loved ones, if you can give them that, none of them will begrudge you a little profit, you've earned it and deserve it for making their lives better, for giving them more time to spend with their friends and family.
Don't think how much are my bitcoins going to be worth tomorrow because if you just hoard them, they wont be worth anything.
Only if you put them to use, a create shops and industry, and goods and services will you draw in the masses, and they will only stay if you improve their lives.
If currencies like this are to succeeed, especially now as people are worried about hoarding for gain, then there is the very real possibility it will price the public out of the market, so destroying the market.
At least a small percentage of a hoard must go back into 'society' opening a business of some sort.
That's how you make Bitcoin sucessful, create businesses with it, not by hoarding it. 

One day, bitcoins may become more valuable that gold.

One day, you might see the following exchange rate BTC: 1.00 = 1 Troy Ounce Fine Gold

Closing in on Silver oz. parity ....

IF each transaction incurred a 0.00000001BTC charge, then when a suficient amount has acrued, enough to buy say 1 small coin, this can be held in reserve, over a number of years, Bitcoin will then start to have a solid foundation.
In fact this gold silver etc could then be 'redistibuted to anyone, use for charity, furthering the bitcoin community, lots of things you could do with it.
Of course it may not need this, and was designed not to, but as an add on it might be of use, raising funds, providing a solid backing, not that it needs it, fiat currency has nothing backing it anyway, and fiat currency sort of work, they are just be used wrongly and for evil intent.