Bitcoin Forum

How about this ?
"It's you, you people. "

Delicious question, and your answer is good.

A related thought: precious metals are backed by the labor it takes to acquire them, unlike paper currencies. Similarly, bitcoin is backed by the labor it takes to acquire, which is perhaps another way of saying "the people", as opposed to some small manipulative group of politicians/counterfeiters. I think it is safe to ignore differences between machine labor and human labor because precious metals are rarely mined by hand.

There is something very wrong when central bankers make money out of thin air, yet it seems reasonable to me when bitcoin mining does something similar. It's interesting to explore the differences between the two models.

You misread this, 
"you" means people who are USING it, HOARDING it, DEVELOPING it, SECURING it, SPREADING it.
Actually, It's ture to every single currency on earth that "Users" are backing the currency.

It's backed by freedom.

your answer is good, but i would answer: its the internet backing, because the only way to destroy bitcoin is to shut down the internet
(backing theyr existence, not theyr value, and as long they exist, they'll have a value (even if it is aproximately zero))

In Bitcoin, posession is control. Transparency in the number of bitcoins in circulation is total. It can be easily verified.

In the case of electronic gold, it is not known how much gold, or how pure, they store in their vaults because it is not audited. And in electronic gold, posession of the credentials is not control.

If they ask you a straight question, give them a straight answer. Bitcoin has no guaranteed exchange for anything else and is thus not technically backed by anything.

Nice sounding wordplay like "backed by freedom/internet/you" just sounds like you're trying to weasel out of it. If you demand backing, then don't use bitcoin or any major world currency.

That is the 'labor theory' of value, and is flawed in many ways, athough it does have an intuitive attractiveness to it.  Bitcoin isn't backed by labor, or electic power, or cryptography, or it's userbase, or it's long distance value transfer services.  Historicly, national currencies were 'backed' by gold in the sense that anyone who possesed a unit of currency had the legal and moral right to demand a defined amount of gold from the government agency that produced the currency.  But what backs gold?  The answer is nothing.  Gold is not backed, because it has an independent value.  That value is a matter of perception, developed over a 6K year history of gold as having value.  Bitcoin has value in the same way, meaning it does not require any explicit backing because it's literally valuable in it's own right, just like gold.  It's no one else's liablity, unlike a US$ or any of the payment methods that are based upon it (bank checks, credit cards, PayPal, Google Wallet, Facebook Credits, etc.)  One could make that rational argument that bitcoin derives value because of all of the things that I mentioned in my second sentence, but value is always subjective while a backing is always explict (and therefore, objective) in nature.

After all, as valuable as gold is as a store of value, without that monetary demand gold wouldn't likely be more valuable than lead.  Bitcoin is valuable only due to it's monetary demand, and it has monetary demand because there is a small (but growing) online community of people that believe that bitcoin (as a monetary & exchange system) has and will continue to do as it has promised, and thus see value in participating in that monetary & exchange system.

I mean, that's really all there is to it.  It's backed by a sufficient number of people believing that it has value.

I once wrote that (http://archive.mises.org/17249/ideological-and-irrational-exuberance/#comment-786219):


Joking aside and after a more thorough analysis, I came to the conclusion that Bitcoin is an example of a pure network good, like language or the internet. It is not "backed" by anything, but it has a comparative advantage in transaction costs against the alternatives. The actions of the state that increase transaction costs of fiat money (e.g. banking regulation, existence of national currencies, war on drugs/prostitution/piracy/whatever and to a certain extent inflation) only increase the advantage of Bitcoin. As long as this advantage persists, I would not worry about its future.

It is backed by currencies weaker than bitcoin.

The old joke with the punchline "I don't have to outrun the bear, I just have to outrun you" applies. I'm a huge bitcoin supporter, but if major countries decided to return to a gold standard, I would be selling my coins. But while the world plays pretend with fiat, bitcoin is superior. 

that doesn't sound right to me? Can you redeem the gold and receive labor?

Some say gold is backed by the energy required to mine it. I find that far-fetched, doesn't "backing" imply that you can redeem the currency and get the stuff backing it in turn?

EDIT: I like moonshadows view: bitcoin/gold are not backed.

I might sell some of mine in that event (don't know what I'll sell it for, though) as a "internet blackout hedge" (shtf) and because I'd fear the panic (and add to it, I know), but I would try to buy back after the panic, because I think, fundamentally, bitcoin has advantages over gold (also disadvantages, but gold is not superior in all respects, like movability and divisibility).

relevant article by cypherdoc: http://bitcoinmedia.com/bitcoin-vs-metals/

Maybe this article will help:

http://bitcoinweekly.com/articles/bitcoin-what-s-it-backed-by

As this question is normally asked by goldbugs, my answer normally is: "Bitcoin is backed by the same thing that backs gold, that is, nothing." ;)

No "base currency" is backed by anything btw. People that say: "I don't accept a money backed by nothing" don't really know what they're talking about. Base money is by definition not backed by anything.

The quick answer is: what is the USD backed by. And after you've gone through several levels of debunking (gold, fort knox, the US government, and so on) you quickly come to understand that the USD is backed by a tacit agreement, an understanding among most people on this planet, that one USD is worth about one USD.

Same same with BTC.

There are some people, probably deep in the Amazon, who would have absolutely no use for one USD. They're not part of the circle of understanding ;-)

wat. This makes no sense. Labor can't be a backing. Gold miners and bitcoins miners mine, because they can get bitcoins and gold out of their effort, and they can change the bitcoins and gold to something else they desire. If no one else would value bitcoins or gold, they wouldn't mine.

Bitcoin Backs a free decentralized economy

Fiat currency exists because our masters want a form of tribute that they don't need to store. For awhile they required gold as tribute, because it was rare and portable, but even that became too expensive to transport and store. Now they impose their currency with holy blessings of value that we are allowed to use so that we are forced to pay for all their property storage. Money that has lost the backing of the force behind it becomes worthless. All governments eventually fail so it follows that all money will fail. Items of barter are the only permanent backing of worth. Gold will always be rare and portable and difficult to store. Bitcoin is the first real challenger to gold.

Someone has a good quote in their signature.  I smile everytime I see it but I can't remember who it is. 

Paraphrased and butchered it is the value comes from its utility.  It has value specifically because of what it capable of.

Same thing backing gold: scarcity.

In this case it's scarcity of computing power instead of scarcity of 79-proton nuclei.

It's nice to see people joining the community are here for the right reasons.

Same time last year a wholly different type of crowd was being attracted to bitcoin.

The usual debunking of this goes like: "My shit is pretty scarce, yet worthless."

I would add, "...just like conventional currencies."

Scarcity is  not a requirement.  Mined & refined silver is more rare in our modern industrial world than mined & refined gold, yet gold still has a higher monetary value.  The same is true for a great many other things, such as 'rare earth' minerals.  Rare earths are not rare, they are just hard to find in a high enough of a concentration to be economically viable otherwise.

"Backing" is a concept which applies to currency substitutes. When a bank issues a note, the backing is whatever the issuer promises to exchange for the note on demand. Back when the U.S. was on a gold standard, for example, the Treasury committed to exchanging each Treasury note for a specific amount of gold (albeit increasingly below the market value, and eventually only in large quantities). These days Federal Reserve Notes are no longer currency substitutes, and no offer is made by the Treasury or the Federal Reserve to exchange them for anything. Ergo, like Bitcoins, they have no backing, and stand (or fall) on their own merits as an independent currency.

I never said all scarce things make good currencies.

You can't send your shit half-way around the world for a fraction of a cent.  If you could (magically) do this, and it was easy for computers to distinguish your shit from countershit fit, then I would consider using it as a currency.  No joke.

If lots of women thought your shit made good jewelry, we might use your shit as currency too.

I disagree.  If there is an unlimited supply of something available for no effort, it is not going to be used as currency.

Disagree all you want, but scarcity isn't a requirement, only a limited supply.  They are not the same thing.  I should say that scarcity is important in the sense that it affects the value of things, but only as the other side of the equation to demand; however scarcity alone doesn't create that demand.  And if something is too scarce for the common person to have any practical experience with it, such as platinum before 1850, then it ends up being regarded as worthless metal and made into cannons for ships built to carry gold.

Close enough for me. :)

s/scarcity/limited supply/

Scarcity is definitely a requirement for something to have value, thus, it's a requirement for something to be a currency. It is not enough, but it is a requirement.

yes, scarcity is not sufficient. You also need fungibility, countability, divisibility, transferrability.

Bitcoin is a commodity money and I still hold the opinion that the term "backed by" does not apply here at all. Bank notes might be backed by something.

I understand "backed by x" as "the note is redeemable for x at the issuer".

When people say things like "bitcoin is backed by the people", I head: "bitcoins value is supported by the people".

All value is backed by human demand, and since it has so many special characteristics, especially limited supply, there will be demand

I feel this question is a little leading because there is nothing "backing" bitcoin. But this isn't the right question to ask. The right question is "Why does bitcoin have value."

Just to set aside the "backing" concept, the electricity of the miners does not back the currency. It validates the blockchain but it does not back bitcoin in any way. Miner's electicity bills are a response to the price, not the other way around, and as the price crashed last year, miners turned off their rigs. Similarly, gold is not backed by the effort of gold miners. It is when the price of gold rises that miners can spend effort panning for a few ounces of flakes in 30 tons of dirt.

So where does the value come from? This is a little bit difficult to conceptualize, especially because it is the result of an equilibrium of a set of differential equations, but the simple answer is that the value of the coins comes from minor differences in the value from when a buyer buys coins, sends them to the seller, and the seller sells them (called the spread). On average, this transaction ends up with the seller making a slightly less amount than the buyer. This amount aggregated over all the transactions in a blockchain is then divided into the reward amount and this is the fundamental value of a bitcoin. However, this is done 1440 times a day and not all mined coins are spent, etc, etc, and also there is an individual preference in each transaction that determine the tolerated spread amount. So it becomes a lot more complex.

But let's just keep it simple.

Let's say the entire bitcoin world consisted of a buyer addicted to ice cream, a seller, and a miner. The seller sells ice cream for $50 that they make with $30 in inputs. Let's run a few transactions.
Every week, the buyer buys $50 in bitcoin and sends it to the seller. The seller puts all the bitcoin they get up for sale, and the next week the buyer buys $50 worth again. Every week there is one transaction which the miner mines for 50 btc. Now what is a fair value for bitcoin?

In this scenario, if bitcoin were $1/btc, then that would mean for each transaction the miner would be getting $50. They could take that 50 btc and buy some ice cream from the seller. The seller would now have 100 btc and would put it up for sale. But the buyer only wants $50 in ice cream, so the seller never makes back that money and they've spent $60 in inputs so they can't continue their business with just $50. The whole equation is out of whack.

I'll just skip forward to a possible answer. It might be that bitcoins are worth about .0196/btc. The buyer buys the $50 in btc and sends it to the seller. The seller then puts their 2500 up for sale. The miner has also mined the transaction and puts their 50 coins up for sale. The buyer buys all 2550 of the coins for $50, of which the seller gets $49.02 and the miner gets $.98. Now, because this is inflationary, in the next round the buys sends 2550, but 2600 end up in the market. However, the price is about stable.

So where does the spread from the buyer paying $50 and the seller getting $49.02 come from? Again, that is a personal preference based on the people who are making the transaction. You can say though, that most sellers would be tolerant of a 3% spread because this is as good as Visa processing, and there is no chance of chargebacks. In addition, buyers might be willing to pay for this if there is an item they feel they can only get through bitcoin (e.g. the ice cream is $49.02 in stores, but the buyer can't get to those stores).

This means that there are two main factors when it comes to bitcoin price: how much is being transacted per average block (the velocity of bitcoin), and how much of a spread is acceptable to an average transaction.

I usually answer with:

Why do screwdrivers have value? What backs the value of a screwdriver?
Because they're useful and it takes effort to create them.

Bitcoin has value for the same reasons.

firstly: +1 on wrong question being asked.

secondly: interesting thoughts! So if I supply 2 values (velocity of bitcoin: 190000 BTC/day and acceptable spread: 1%), you can calculate a bitcoin price from that? It seems to me there are some more values that'd need to be supplied, no?

It is a lot more complicated. I simplified it along those two lines just to give an important illustration of where the actual value comes from. Another factor is savings rate, because if the miner or the seller is not selling their coins, it has short term effects. In addition, this is just how the market moves to resolve itself to a price that doesn't topple the system. So you might be able to estimate an average price over a few months, but it wouldn't help you to know what the price should be right now.

There's really a lot of things in play, but it can be easily demonstrated where the money is coming from, which I think is what concerns most people. The money comes from the people depositing at exchanges, and because miners are getting a part of the economy, it means that that amount is being split between the miners and whoever is intended to withdraw the money.

Really?

Some governments promise to redeem their paper for gold then break that promise. Now if they promise it again you'll go for it?

Why would you drop coins for paper backed by even a credible promise of gold, but you don't drop coins for actual gold which you could get now? I suppose the paper gold would fly through the tubes better than actual gold, is that it or something else also?

What do you say when they ask to see your huge stash of screwdrivers?! :-)

Show them the hardware isle.

Probably the "something else" is the not-so-low probability of no major country deciding to return to a gold-backed fiat currency.

I agree with Detlev Schlichter who argues for a market-based monetary system: http://whiskeyandgunpowder.com/the-death-of-banks-and-the-future-of-money/


I word it a little differently: Scrap the paper, we need free market money.. Just sounds better, doesn't it?

Thats the way it's going to (hopefully) go, guys. And we all better keep at least some of our coins, because bitcoin is a serious player in the market for free market money.

After having contemplated this thread with considerable joy, I must agree with Fjordbit that "What is its backing" is not the right question to ask.

So an appropriate answer might be:

Who cares? Look, I can buy coke and hookers with it! *buy coke and hooker for person asking the question*. More questions?

this thread has gone in the right direction.  if someone asks what is "backing" a currency, they simply don't understand money.

The argument offered by the advocates of central elastic money goes like this:
1/ central money is the only legal tender to extinguish a fiscal debt
2/ the State has unlimited taxing power over the entire economy ( the implication being that the State has the power to nationalize the entire economy)
3/ therefore, central money is backed by the entire economy.

This is a HUGE fallacy because,unless you live in North Korea, assumption 2 is simply wrong..
Therefore, central money is backed by the limited taxing power of the State enabling lawful confiscation of a fraction of the economy: that leaves a very large chunk of the economy available for another medium of exchange..

To sum things up: let the State enforce elastic money to collect taxes and to provide useful public services and let the people use commodity money like bitcoin to create optimal economic conditions.

Even if we were to take items (1) and (2) for granted, you still cannot conclude (3).
When you say "this bill X is backed by Y", you're stating that there is someone (normally the issuer of X) who is contractually obliged to redeem your X bill for Y at reception. He must give you Y if you give him X, otherwise it would be a fraud. So it doesn't make sense saying that something is backed by "the entire economy", as such contract wouldn't even be possible.

A "money backed by something" is not "base money", it is just a "money substitute".  By definition, base money cannot be backed by anything. And bitcoin, as gold and government money for that matter, are all base money (= the component(s) of the monetary base, or M0).

The best answer to the thread title question is to compare bitcoins with gold.

Nothing backs gold, gold itself is what has value. Why does it have value? What is gold? Gold is a clump of rock. Why don't people value other clumps of rock? Because the clump of rock known as gold has special properties. So people don't really value gold, people value the properties that gold has. If dirt had the same properties as gold, dirt would be likely equally valued.

And this is how bitcoins compare to gold. They too aren't just any digital currency, they are a digital currency with special properties that people equally value. If anyone is going to make an argument that gold is actually backed by it's properties the same exact argument can be made for bitcoins, namely that they are backed by their properties. And as long as bitcoins can maintain their properties they'll remain valued.

It's that simple.

Please watch the 5min long video presentation at this link to learn more about why gold became money: http://www.zerohedge.com/news/why-did-gold-become-money

I had a good luck with the following summary:

Bitcoin is backed by the lack of faith in government. People who value bitcoin have more faith in a "distributed zero-trust cryptographic-currency" implicitly give negative credit to their local governmental and banking institutions.

Sorry for necroposting but I realize the best answer is not in the thread yet. How about this one.

Just like gold, bitcoin is backed by scarcity and usage value.
Gold is scarce and valuable for making jewelry.
Bitcoin is scarce and valuable for processing internet payments.

Any other question ?

Didn't I basically say the same thing?

Because I said so.

IMHO talking about properties as in your post isn't clear.

Something may have very special properties and yet be worthless because the properties are not valuable in any usage.

Also you are not mentioning transaction processing while I believe this is where there is a huge value proposition for using  the bitcoin network. That's what gives "backing" to the price of bitcoins.

Because I said so, too.

This is most accurate.

Although I'd probably go with "It's backed by human demand for a suitable money, just like gold."

But that's not what backing is. Backing is a promise to give something worth more for something worth less. Backing is for worthless things like paper. Not bitcoin or gold.

You nailed it, thanks.

Anytime you want baby!

True, your statement of what backing is is accurate. But asking the question implies certain presumptions that are untrue, and I'd want to address that. A simple reply of "Nothing," with no follow up won't really progress the conversation.

True, but, "Nothing. Backing is a promise to give something worth more for something worth less. Backing is for worthless things like paper. Not bitcoin or gold," would.

It's backed by the system of people using computers.

1)  Without people, nobody hits the "go" button on their miners or opens their client software, and nobody makes transactions.

2)  Without computers, transactions are not confirmed and thus there is no confirmed value.

You need both.  Computers without people operating them are useless, and people without computers cannot use Bitcoin.

Meh. Too wordy, plus it doesn't get to the heart of WHY paper, bitcoin, gold, etc. are different. It's just antagonistic toward paper without showing what makes gold (and bitcoin) valuable.

My take on it, anyway. ::)

Well, what makes gold valuable? People want it. Honestly, nothing more, nothing less.

Yep. Human demand.

When asked this question I reply: "maths"

Good one! "Bitcoin: Backed by mathematics."

No. It's value may be supported by the "system of people". It's not backed by anything.

A is backed by B implies one can redeem A for B. Can you redeem a bitcoin for some "people using computers"? Certainly not.

EDIT: you also can't redeem it for some math.

I think maybe a good answer is: "It's not backed by anything since you can't redeem a bitcoin for anything anywhere. However, bitcoins have value because... <explain why bitcoins are valuable>"

As was explained above, backing is something used with paper currencies, which bitcoin is not. Bitcoin is a commodity money.

Backing infers dimensionality to an object as having an unseen side. In the real world we know that backings exist after the age of object permanence. We extend the definition to Newton's Third Law of Motion of equal and opposite actions. We then extend that object permanence even further to believe that all actions have consequences.* This brings us to faith.

From the age we have faith that something we observed once will happen again under the right conditions, we develop confidence in these actions and outcomes. Once something has established a functionality that we observe to be reliable, we believe that under certain conditions we will always have predictable results.

Bitcoin is backed by our faith and confidence that it is a very reliable and functional currency.


*Some even go as far as to believe that everything happens for a reason, but that belongs in a discussion about the future of Bitcoin.

There is no need for backing.  A need for backing presupposes that Bitcoin is an indirection or representation of something else.  Whereas Bitcoin is not a child node, but a universal master ledger of goods and services exchanged.  It has no parent (or, if you prefer, lower turtle :)).  It can directly record income and distribution of value, as it flows from person to person.

For 5000 years you could provide goods and services to society and record that fact via acquisition of gold, which acted as an implicit ledger of sorts.  Now the ledger actually exists, explicitly!  No need for any pseudoledgers above or below.

That's why it's revolutionary.  To update Plato a bit: up to now, we've been listening to vynil records and MP3s, but with Bitcoin we get as close as possible to the actual performance from which those recordings were sourced.  It's not 100% transparent because the musicians are all wearing masks, but the key thing is that all the notes come through with zero delay and zero distortion.

I like to answer the question "What is it backed by?" by saying the following.

The words "backed by" are meaningless. They havent meant anything since we went off the gold standard. They originally meant that banknotes could be redeemed for physical gold or silver, kept back in a vault at the bank. Euros and dollars have not been "backed by" anything since we went off gold.

The bitcoin opponent then usually says that euros and dollars are backed by the government. I then respond that that is false. Euros and dollars are not backed by the government. Their value goes down at a minimum rate of 2% per year, which is the official inflation target. And its usually more. Euros and dollars kept in a bank, will lose half their purchasing power after 30 years. The government has never compensated anyone for this loss. Therefore the government does not "back" their own currency.

Cryptography Software and a giant computer network.

You could also say "the same thing that backs anything of value - its utility".