Bitcoin Forum

Personally I don't think Bitcoin absolutely needs to be backed up by anything else. It's a great medium of exchange as it is. But some people see the missing backing as a huge disadvantage that could result in a downward speculation spiral that would make bitcoins worthless.

As long as bitcoin can do stuff that no other medium of exchange can do, I don't see this downward spiral to 0 happening. But to ease the minds of skeptics, why don't we create our own backing for Bitcoin?

Set up an organization that accepts donations from community members. All donations will be put in gold (alternatively a basket of commodities/government currencies), and the organization will announce that it will forever pay out exactly x gold grams for 1 Bitcoin.

So, for instance, if the organization holds 10kg of gold, it would promise to always pay exactly 10 000 / 21 000 000 = 0.000476 gg/BTC

Now the market exchange rate may rise way above x gg/BTC, but if people trust this organization the exchange rate will never go below.

The hard problem seems to be to find the people to put in charge of the organization. But it seems very likely that we can find people more trustworthy than the people in charge of government monetary policy.

I think this could help Bitcoin gain trust.

It is a nice idea, but bitcoin exchange rates fluctuate so much that you could lose out massively by backing up investments with gold. The way bitcoins are rising, i don't see the rates dropping at all in the future, i can only see them go up and up, so what would be the real plus point to doing this?

1. This would be an organization with no intent to profit. All funds would be donated so noone in the organization would be able to lose anything. All it would do would be to promise to pay out x gg for 1 BTC. Also, if the market trusts this organization, the fact that it exists would mean that the exchange rate would never go below x gg/BTC. Of course the funds of the organization should be large enough to ultimately allow every BTC to be bought this way.

2. This is not primarily meant for those who already think that the Bitcoin exchange rate will rise in the long term. But creating this organization would give Bitcoin even more credibility and would serve as an argument when you tell people about Bitcoin and they fear them becoming worthless.

I think the harder problem would be to find the people to put any money up for it.

The reason the concept of "backing" exists is because otherwise an unbacked form of money has the potential to be devalued through inflation of its supply.  Bitcoin doesn't have that potential problem.  Therefore this "backing" doesn't really solve any problem that applies to bitcoin.

Here's why this type of backing doesn't achieve anything:

If the "natural" exchange rate is higher than the backing price, there's no need to have a backing price. And if the "natural" exchange rate is lower than the backing price, everyone sells all their bitcoins to the backing organization, and Bitcoin fails.

Personally I don't believe that I'm in danger of death by unicorn impalement but some people really worry about that. They walk the streets every day in constant fear of being attacked and impaled by a rogue unicorn.

In order to ease the minds of these phobics why don't we add anti-unicorn features to the blockchain?

Bitcoin could be devalued through other processes than inflation, through pure supply/demand for whatever underlying reasons (downward speculation spiral, a superior alternative emerges, etc.).

If the Bitcoin community is convinced that this would help Bitcoin gain trust and acceptance then a sizeable donation could be collected.


You miss the argument that this organization could itself be the difference between Bitcoin failing and not. If everyone trusts the organization and know that they will always be able to convert their bitcoins to x gg/BTC, they will have an easier time trusting Bitcoin.

You know, I didn't come up with this model. The dollar used to be backed by gold as well and it indeed served a function and contributed to the credibility of the dollar.

Then when Bitcoin becomes a threat the banks lobby the US govt who links Bitcoin to terrorism and seizes the gold.  The seizure combined with the media reports of Bitcoin no longer backed by anything causes Bitcoin to crash overnight.

No I like decentralized just fine.  

Also the backing would be next to meaningless.

Lets be optimistic and say the backing entity got $100K worth of gold.  $100K / 21M BTC = $0.004762 (worth of gold) USD/BTC.

So instead of someone saying "I am not buying BTC for $6 it is not backed by anything" they will say "I am not buying BTC for $6 it is backed by only half a cent of gold".  If anything it could be a psychological anchor preventing BTC from rising further in value.

+1

Bitcoin is a base value, which is backing only by how people value it. Like gold.

I am quite happy with having bitcoin backed by all of us.

But lets do the numbers for 100% backing of all current bitcoins by gold.

According to bitcoinwatch the market cap of bitcoin is US$57,505,000 and the price per Troy ounce of gold is $1607 per Toz.
There are 31.1 grams in a Toz

So bitcoin en masse is currently worth 57,505,000 / 1607 * 31.1 grams = 1,113,000 grams of gold.

Gold's specific gravity is 19.3 so that is:
1,113,000 / 19.3 / 1000 litres = 57.6 litres.

My fridge is about that size capacity.

<Jim walks over to fridge. Opens door>
OMG my fridge is full of gold. Where do I send it ?
</end fantasy>

Right, but gold didn't need to backed by silver, or vice-versa, because gold itself is scarce and the paper used for printing the dollar was not.  Therefore the paper had value because it was backed by something scarce.

Bitcoins are scarce.  The existing and future supply is known. They don't need this backing by gold or anything else.

I remember a long time ago, I made a post with a similar idea, but Bitcoin would instead be "backed" by the one thing that is essential to its continued existence:  Computers.

Right, that's not much. But gold itself is in a similar situation. Most of its value stems from its use as a store of value, but a tiny bit of the value of gold stems from its use in electronics and jewelry. Economists and gold bugs point to this "intrinsic" value, however small it may be, as the reason gold can be trusted.

Gold is not trusted only because it is scarce. It is also trusted because it has other uses than as a store of value or medium of exchange, i.e. in electronics and jewelry. Bitcoin could emulate this by creating a backing organization.

Bitcoin's backing stems from its cryptography, which prevents the arbitrary replication of coins, along with its other properties that allow it to act as a good medium of exchange.  Similarly, gold's "backing" stems from its scarcity, and other physical properties, that make it suitable to act as a money.  If gold could be arbitrarily replicated or if its scarcity was similar to iron, gold would cease to be a good money. Thus, it is totally pointless to back Bitcoins with anything because Bitcoins already have value due to the fundamental properties they possess.  They don't need backing like paper because paper can be easily replicated.  Initially paper currencies were nothing more than warehouse receipts for gold bullion.  People traded the receipts as if they were gold because they could be redeemed for gold at any time.

Think about what would happen if a Bitcoin represented some fixed amount of gold. For each ounce of gold a person places into a bank, that bank would then issue that person one Bitcoin.  Obviously this presents a radically different system than the present Bitcoin system, and one that is completely unnecessary anyways.  The gold held by the bank would simply sit in the vault unused for any other purpose; it would become a wasted resource.  

The purpose of a gold backed currency is to prevent arbitrary inflation of the money supply.  In fact, the U.S. could emulate a gold standard WITHOUT any gold by simply creating a monetary system where the number of dollars in circulation is set to a fixed limit.  Setting a fixed limit of dollars would achieve the same economic results as if the country was operating on a gold standard, yet the banks wouldn't need to hold any gold at all.

Bitcoin is the best of paper currencies, electronic currencies, and the gold standard all rolled into one.  Bitcoin eliminates the need for backing, allows for online transactions, is easy to store and carry, eliminates the need for banks/government to issue the currency, and retains the same anonymity as physical currencies.

Stephen Gornick, to show that scarcity in itself is not enough to provide value I need only point to SolidCoin or other Bitcoin forks.

The US can emulate gold in that way because they force people to pay taxes in dollars and therefrom the value of dollars are derived. Noone is forced to pay taxes in Bitcoin so Bitcoin cannot emulate the properties of gold in this fashion.

That's true for most of the value of gold, but a small amount of the value of gold stems from its use in industry and jewelry. This "instrinsic" value is what economists and gold bugs point to as the reason gold can be trusted. Bitcoin can emulate this by creating such an organization as proposed.

Bitcoin has "intrinsic" value as well (actually, there is no such thing as intrinsic value because all value is subjective to each person engaging in any given trade).  Bitcoin's "intrinsic" value stems from the properties it possesses which allow it to act as a money.  If Bitcoin did not have the properties it does, no one would voluntarily trade real goods for it.  Similarly, if paper currencies were not violently imposed or if paper currencies were not backed by some physical commodity, no one would accept them in exchange for real goods.

While gold can be used for jewelry, its use as a money has nothing to do with this at all.  Gold would still be a good money even if it was horribly ugly to look at.  The key properties that make up a good money are:

-scarcity
-divisibility
-recognizability  (easy to identify, hard to counterfeit, easy to verify)
-ease of transport/storage

How pretty something is doesn't make the list.

Don't know if brofist. Poni ain't hurting noponi. 8)

But this hits the nail on the head. What's the point? Bitcoin already is a backing currency, why back a backing currency with something else? The only reason would indeed be to try to satisfy people who mostly have no idea what they're talking about. That's impossible anyway, they'll always find some random phrase to "prove" whatever they like.

I've suggested this before here (https://bitcointalk.org/index.php?topic=68162.msg794795#msg794795).  The hard part is finding people to donate the backing.  Specifically, finding people to donate enough backing so that the peg sticks.  I estimate it would need to be on the order of a million USD.

^this.

Centralized backing is a point of attack and if when attacked, would probably result in a psychological kick in the nuts to Bitcoin.
(perhaps not fatal, but possibly enough to set it back years/decades)
Conversely - Bitcoin has bootstrapped itself just fine without it, so it seems it doesn't need any psychological trick like this to thrive.

Bitcoin is already backed by a million USD of buys on the MtGox order book (http://mtgoxlive.com/ordersMtGox order book). The price is dynamic, but the USD are real.

In case it wasn't clear, I meant a million USD worth of real assets, not fiat fun-bux.

Do you see the irony in your valuation of the "worth of real assets" in terms of USD?

Bitcoin backing?  Lap dance coupons.

I'd vote for backing gold with bitcoin instead.
Bitcoin is transparent and has a controlled scarcity, whereas gold was a good short term solution that doesn't have either of these advantages. What would happen if we found out that 90% of the earth's core was made of gold and we had machines to mine it? I am exaggerating of course, but I do know that people still find large sums of gold today.
I am unaware of a major governmental currency that is still really backed by gold (there very well might be, but I am more aware of fractional reserve as the primary method) - so why should bitcoin be?

Why back all 21 million coins? Collect 100k coins at an address and get a company to back it with 100 oz gold. These 100k coins would be traded at a premium, since you can always turn in 1000 coins for 1 oz of gold.

Is it possible to differentiate between coins using only one block chain? If so, could facebook collect 100k coins and deem them "facebook coins" and use them for facebook transactions, while mooching off the one 'main' blockchain.

Backing is crap. Backing is a promise that usually gets broken. Who do you believe? Who do you trust will always be willing and able to pay? What other thing do you even want? What will back it?

I'd rather just have the useful thing itself.

Agreed.

BTW I recommend listening to Stef's opinion on BTC, it really clarifies the whole "backing is neccessary" misconception:

http://www.youtube.com/watch?v=s_VewfiuCao

What is the Confederate dollar backed by? We need to think long term here. Bitcoin is backed by the freedom of the Internet. If the internet loses its freedom, then Bitcoin loses all its value.

SolidCoin was not scarce... its supply was manually controlled.  There are several forks with nontrivial value, but network effects cause bitcoin to be far more valuable.  If bitcoin fails in a way that these other forks address, or DNS gets grabbed by the ITU or similar, namecoin or another fork will gain value.

here is how to "back" bitcoin: merchants price their goods at a fixed amount in BTC, and vary the USD price accordingly.

No.  It's perfectly reasonable to communicate the approximate current value of an undisclosed asset in terms of a widely-used currency.

The topic is "backing" of Bitcoin.  Market value is not the same thing as "backing".

No.
No.
No.


There is literally no good reason to back Bitcoin with anything. This would defeat the entire purpose of Bitcoin. There is literally no situation in which trying to back bitcoin with anything physical will have a good result.

Here's a handy rule of thumb; don't suggest trying to regulate or control the price of Bitcoin in any way. Bitcoin was made specifically to be regulated in such a way, and with good reason.

To quote someone on Reddit:

False.

Unit of account and money really should be considered two different things.

Bitcoin does not necessarily need to be the first if it is a great tool for trade.


I guess we could back it at 2$/BTC for some slight psychological effect, but it would be better selling your house for BTC, renting it out or what have you.

Name a situation in which you think it would be good.

+1
The skeptics' minds will not be changed by any backing.

If the gold backing is instituted before B is accepted by most people as a viable and useful currency, the banks will get the government to seize this organization, together with the gold...

IF and when B is accepted by most people, whether or not the skeptics exist will be irrelevant.

To me, they are irrelevant now, because B will live or die on its own merits, regardless of the unavoidable, eternal skeptics.

Besides the appearance of some superior digital currency, centralization in any form - mining, exchange, or via gold backing - seems to me to be the biggest threat to Bitcoin's survival right now.

I think you are overlooking the idea that Bitcoin is supposed to *be* the gold in this senario. It's backed by it's cryptographic security. Even though we all accept gold as value, it's as arbitrary as any other item.

Where would this 10kg of Gold for example come from? Donations? IE: we would all go buy some gold? Gold value changes (quite dramatically sometimes) and it's value is calculated in other currencies. Your plan would essentially peg BTC to some other currencies valuation against gold. And then who would watch this gold? And who watches the watchers? Where would we put it? Suddenly BTC goes from being independent/ephemeral/online/virtural/etc... to being a large bank downtown where the government can walk in any day and take it all.

Bitcoin should be backed by huge amount of goods and services but right now we are very far from it… That will create a strong demand and deflation until stability

+1 

Maybe it would make more sense to back gold with bitcoins ;) 

+1

Backing is a requirement for people who cannot think outside of the box of elastic money.
Scarcity and usefulness of the bitcoin technology are enough to give value to the bitcoin network.
The current value (120 M) of the bitcoin network is dwarfed by the valuation of networks such as Visa, MasterCard or even Western Union.
What is backing those networks ?
Bitcoin is only monetizing a fraction of the value of something called the internet.

Heh, I keep seeing that and thinking I missed a huge rally overnight or something.  I'm presuming you are considering all 21 million BTC, even though less than 10 have been issued ...

That's right, I believe the market price reflects the market expectation that the quantity of bitcoins will reach 21 million.
Therefore the correct valuation of the bitcoin network should be even 134 M with today's exchange rate.
However I expect a rally in early december when the reward gets halved because the market is irrational  ;)

Sorry, I'm not interested in expanding upon that.  It's not too difficult to figure out.  Have a little imagination.

Translation: You're right, I cannot come up with a single example, but I am not intellectually honest enough to admit it.

+1. OP - why does gold have value? This is a concept people who are less mature in their monetary understanding often fail to grasp. As someone else noted, the only reason to "back" a currency is to provide some known stability to the monetary base. Bitcoin has fully-known supply growth and fully-known ultimate supply size built-in. Bitcoin is fundamental. No need to "back" it.

Gold is similar in that the supply and supply-growth is roughly known (though obviously with a lot less precision than bitcoin), and has other qualities that make it fit to be a unit of exchange (eg, durability, fungability, recognizability, etc), and thereby give it utility (ie, "value"). Bitcoin has those properties as well, except much more explicitly, which is a good thing. You can think of bitcoin as a better gold (ie, fit for transactional use in modern times). Gold is what (historically) "backs" other currency. Bitcoin should be the same.

The only fundamental downside to bitcoin relative to gold is that bitcoin is not supported in a world without computing/internet/technology. But that's fine...I think we all have to gamble that humanity won't go too apocalyptic in our lifetimes.

BTC's backing is as good as any fiat. ....Confidence..... Its why fiat has value.

Bitcoin is backed by things like entrepreneurial rig-running miners, state of the art encryption, reliable ISPs, legal tolerance, and belief. Blackouts, disappointed miners, revolutionary quantum physics advances, a bad cybersecurity czar or a bad Satoshi Nakamoto could turn bitcoins into greenbacks. Don't forget that fungibility is a trade-off for permanence: there are hundreds of posts about data loss. Lightning, water, static, forgotten passwords, and theft limit the safety of the currency in a big way.

The most tangible and probable backing for bitcoins are hourly wages. Would you work for 2BTC per hour? Would your geeky CEO tell payroll to set up a bitcoin security deposit option? If companies can accommodate PayPal for email addresses, they might be willing to take an extra step/exchange. Maybe have a single percentage of net wages transferred to an address for that purpose. Backing bitcoin with service work is the best way for the currency to gain traction and stability.

In a heartbeat. Are you hiring?  ;)

So would I.

Does gold need backing? And when we "back" money with gold, all we do is say those pieces of paper are better now because they are backed by shinny rocks. It's just a game of illusions really. 

I've heard a lot of bad ideas on this forum, but this one takes the cake.

Another way to think about this is: the paper dollar was invented as a clever and successful way to gradually separate people from their gold.