What is bitcoin backed by? My favorite answers

[swappermall]

A lot of uncertain answers. I am surprised that the backing for bitcoin is not obvious to all.

Bitcoin is backed by the blockchain. (Currently) a 2Gb secure datafile of historical transactions and issuance.

The genius of Satoshi is like a diamond, multi-faceted. He understands the principle of inertia in persistent systems. As the blockchain grows it becomes more important to everyone who relies upon its integrity defining a medium of exchange. If BTC becomes the global currency then the blockchain will be the single most valuable data file in existence. It is already worth $160m. The fact that it is replicated on so many nodes reinforces its value and persistence.

The blockchain is not 'a data file'.
It is an ubiquitous piece of information that is copied by every user of bitcoin.
The blockchain itself is worthless. Everyone can get the file trivially by using the client.
Moreover, you cannot get a single bitcoin from knowing the information in the chain. You would have to interact with the whole system in a particular way to get to any kind of value.
In fact i would say that it is the exchanges that actually give bitcoin any real-world value at the moment. How much would you value the blockchain if mtgox said: 0.000 0.000 ?

The blockchain is logically a single file, and the fact that it can be copied so easily adds to its value, not reduces it, (by enhancing its utility).
The question of valuing the blockchain is to ask "How easy is it to construct another, different one, of similar size, from scratch?"
The answer is - nearly impossible. In terms of Information Theory the blockchain is probably the most information dense object in the world. It is so dense that not even a single byte can be changed without it being degraded. Making another requires enormous amounts of computing power, and not only that, a new one would lack the real-world connections to thousands of individual people with discrete personal holdings represented by entries in the blockchain.

This is the backing for bitcoin.

Mt.Gox provides a mechanism for the valuation of this phenomenon in a "wisdom of the crowd" manner.

http://www.youtube.com/watch?v=iOucwX7Z1HU

+1 for this answer by Solex

I disagree with those who loosely state that bitcoins have no intrinsic value.  Bitcoins have the ability to transfer economic value to a designated address anywhere in the world practically at no cost and it can do so almost instantly.  No other commodity, that I know of, has this ability.  I expect the perceived value of this unique capability to increase dramatically as people come to recognize more and more productive uses for this new means of unparalleled economic efficiency.

[mobodick]

A lot of uncertain answers. I am surprised that the backing for bitcoin is not obvious to all.

Bitcoin is backed by the blockchain. (Currently) a 2Gb secure datafile of historical transactions and issuance.

The genius of Satoshi is like a diamond, multi-faceted. He understands the principle of inertia in persistent systems. As the blockchain grows it becomes more important to everyone who relies upon its integrity defining a medium of exchange. If BTC becomes the global currency then the blockchain will be the single most valuable data file in existence. It is already worth $160m. The fact that it is replicated on so many nodes reinforces its value and persistence.

The blockchain is not 'a data file'.
It is an ubiquitous piece of information that is copied by every user of bitcoin.
The blockchain itself is worthless. Everyone can get the file trivially by using the client.
Moreover, you cannot get a single bitcoin from knowing the information in the chain. You would have to interact with the whole system in a particular way to get to any kind of value.
In fact i would say that it is the exchanges that actually give bitcoin any real-world value at the moment. How much would you value the blockchain if mtgox said: 0.000 0.000 ?

The blockchain is logically a single file, and the fact that it can be copied so easily adds to its value, not reduces it, (by enhancing its utility).
The question of valuing the blockchain is to ask "How easy is it to construct another, different one, of similar size, from scratch?"
The answer is - nearly impossible. In terms of Information Theory the blockchain is probably the most information dense object in the world. It is so dense that not even a single byte can be changed without it being degraded. Making another requires enormous amounts of computing power, and not only that, a new one would lack the real-world connections to thousands of individual people with discrete personal holdings represented by entries in the blockchain.

This is the backing for bitcoin.

Mt.Gox provides a mechanism for the valuation of this phenomenon in a "wisdom of the crowd" manner.

http://www.youtube.com/watch?v=iOucwX7Z1HU

+1 for this answer by Solex

I disagree with those who loosely state that bitcoins have no intrinsic value.  Bitcoins have the ability to transfer economic value to a designated address anywhere in the world practically at no cost and it can do so almost instantly.  No other commodity, that I know of, has this ability.  I expect the perceived value of this unique capability to increase dramatically as people come to recognize more and more productive uses for this new means of unparalleled economic efficiency.

I find this too self-referential.
What you say is the same as saying that the system supporting the gold market is part of the instrinsic value of gold.
Bitcoin only has this perceived intrinsic value while it is being used.
What you name are properties of it being used as a currency (or store/transport of value).
It's like saying part of the intrinsic value of gold is that you can make boulions from it. :/
You have to ask yourself, what is bitcoin worth without being used as a currency.
That would give you its intrinsic value.

Maybe you are confusing 'intrinsic value' with 'economic value' ?

[Jutarul]

backing requires an authority or individual to provide guarantees which are not intrinsically given by the item exchanged. At the very least, all paper currencies require backing, because they are easy to counterfeit. This backing usually takes the form of military power and legal threats.

Nobody can be stopped from providing additionally guarantees for bitcoin. Thus to correct my previous post:

The question is misleading. Bitcoin doesn't haverequire backing. But other things may be backed by bitcoin.

E.g. a government can decide to participate in nation sponsored bitcoin mining. This is a reasonable thing to do, once a nation decides to back their paper currency with bitcoin.

[thefiniteidea]

Solex and mobodick have the right idea. Here's an excerpt from the blog in my signature:

The value of Bitcoin comes from the implementation of a true, public ledger, with every recorded bit of information/data that the economy creates, processes, and stores. The utility of that record is what defines the worth of its currency. Instead of atoms like gold or silver having "intrinsic value", subatomic particles like electrons (and in the future, possibly photons) are becoming the stores of value for our new world. Our global society has been migrating away from the old physical world, to this new age, where information is becoming a more valuable part of our existence. Corporations know that in order to survive they must hire strong ideas, not people. A majority of the world's societies have been participating less and less in the physical world, and more in digital networks, like Facebook, or this blog that you are reading, right now, on the internet. Being able to verify all the accounts and transactions of your world can be very powerful. It can also be scary, which is why Bitcoin transactions include anonymous capabilities.

We are leaving our physical world people, don't stay attached to it...

[cptmooseinc]

This would be a possible way (as the tech matures) to make the blockchain something physical and recoverable. Though it couldn't be updated or read quickly, it can be turned entirely into something physical that can exist and be recovered at some point by the right people with the right tech to do so.

http://www.extremetech.com/computing/146600-new-technique-stores-terabytes-data-on-dna-with-100-accuracy

[HBBZ]

Long story short, if we really have to come up with something about its backing, then Bitcoin is backed by the common effort of the world-wide community, its incentive to keep the system running, and the passion to build upon its unique features. Unlike money today, Bitcoin is not backed by force, it's backed by love.  

Thought-provoking. One thumb up

[thoughtfan]

One thing I've really enjoyed in reading this thread is there are so many diverse ideas about what 'backs' Bitcoin and much disagreement.  I would be a lot more concerned of the possibility of Bitcoin enthusiasts being in some kind of self-deceptive, self-reinforcing cult if it were a community of like-minded people.  Yet although there are obvious trends Bitcoin does attract people from virtually all political and economic stables which I believe gives the idea and the currency resilience.

My conclusion:  Come to agree on things if you must but long may diverse opinions be seen and be welcome here

[sounds]

How long could Bitcoin survive if there were a global internet shutdown? I'm not sure how such a shutdown would look.

[Spaceman_Spiff]

We are leaving our physical world people, don't stay attached to it...

Since when are electrons and photons not part of our physical world?  I think you mean to say the micro/nano/whatever scale is becoming increasingly important over the macro scale.

[Anon136]

A lot of uncertain answers. I am surprised that the backing for bitcoin is not obvious to all.

Bitcoin is backed by the blockchain. (Currently) a 2Gb secure datafile of historical transactions and issuance.

The genius of Satoshi is like a diamond, multi-faceted. He understands the principle of inertia in persistent systems. As the blockchain grows it becomes more important to everyone who relies upon its integrity defining a medium of exchange. If BTC becomes the global currency then the blockchain will be the single most valuable data file in existence. It is already worth $160m. The fact that it is replicated on so many nodes reinforces its value and persistence.

The blockchain is not 'a data file'.
It is an ubiquitous piece of information that is copied by every user of bitcoin.
The blockchain itself is worthless. Everyone can get the file trivially by using the client.
Moreover, you cannot get a single bitcoin from knowing the information in the chain. You would have to interact with the whole system in a particular way to get to any kind of value.
In fact i would say that it is the exchanges that actually give bitcoin any real-world value at the moment. How much would you value the blockchain if mtgox said: 0.000 0.000 ?

The blockchain is logically a single file, and the fact that it can be copied so easily adds to its value, not reduces it, (by enhancing its utility).
The question of valuing the blockchain is to ask "How easy is it to construct another, different one, of similar size, from scratch?"
The answer is - nearly impossible. In terms of Information Theory the blockchain is probably the most information dense object in the world. It is so dense that not even a single byte can be changed without it being degraded. Making another requires enormous amounts of computing power, and not only that, a new one would lack the real-world connections to thousands of individual people with discrete personal holdings represented by entries in the blockchain.

This is the backing for bitcoin.

Mt.Gox provides a mechanism for the valuation of this phenomenon in a "wisdom of the crowd" manner.

http://www.youtube.com/watch?v=iOucwX7Z1HU

You have to ask yourself, what is bitcoin worth without being used as a currency.
That would give you its intrinsic value.

Maybe you are confusing 'intrinsic value' with 'economic value' ?

Nothing has intrinsic value. All valuation is the product of subjective preferences. Even some people prefer not to have food (think forced feeding in prison)

[xxjs]

Nothing has intrinsic value. All valuation is the product of subjective preferences. Even some people prefer not to have food (think forced feeding in prison)

Intrinsic value, in reference to money, is the value is has when the moneyness, or the exchange value, is removed.

For bitcoins, that is nothing. For fiat money, it is the paper value, you can decorate your walls or wipe your ass with it. Zimbabwean dollars has so little money value for the time being, its intrinsic value is dominant.

For gold, it is the technical use in electronics, it can be used to print title on bibles, it can be used to cover other metals for prettyness. For gold rings etc, the beauty is the value. Maybe for really heavy arm rings and the like, the owner also considers the money value of the ring to be useful sometimes in the future.

If you use the wider definition of intrinsic, as essential, natural, or from deep inside, then you are correct, nothing has intrinsic economic value, only use value as expressed by each actor on the market.

The special thing with money, is that when a commodity starts being used as the preferred commodity, it gains more value than its use value. for instance, if gold should again become useful as money, its value would rise, while silver and other commodities would stay put. Same if silver should become new money, it might go higher than gold in value.

This additional value is the exchange value, or the value of its moneyness. You could say that it is the use value of its service of facilitating indirect exchanges on the market.

At the time of the gold standard, a fully backed note (a note saying it represents some mass of gold) was worth more than the same mass of gold, even if the note holder had to pay the bank to store the gold safely. That was because the note was more handy in making exhanges.

So different money types has two value components, its exchange value and its intrinsic value.

[solex]

The major types of value seen in currency systems.

A fundamental of exchange and economics is that only products can buy products.
Money is the medium of this exchange and currency is a structured form of money.

Products are produced by work, which could be physical (labor, automation, computation, etc) or intellectual (design, research, planning, creativity, etc).

Currency can encapsulate prior work, e.g. a gold coin, which required much physical work (mining, refining) and intellectual work (finding it, managing its transition from ore to ingot.) Such a coin has intrinsic value. Someone performed prior work and that is passed hand-to-hand as a gold coin buys products.

Currency can encapsulate future work e.g. a Federal Reserve note which is a claim on a proportion of taxation of future work, guaranteed by the US government. Such a FRN has fiat value. Someone is expected to do work, paying tax, and this expectation is passed hand-to-hand as the note buys products.

The fifty-year period from 1921 to 1971 saw a paradigm shift in OECD countries which was a transition from an intrinsic currency system to a debt-based fiat system. This has been emulated by the rest of the world. The "advantage" of a fiat system is enabling pulled forward demand, by monetizing future production. The forty-year period since 1971 has seen this advantage exploited to the full. The credit crisis of 2007, ongoing, is a reflection that as future production has been monetized as can realistically be expected to occur. Unless 100-year mortgages enter the mainstream no new leg up is possible in this paradigm. The problem for OECD countries is their economies have become demand distorted, debt addicted, and production-depressed, riddled with insolvent banks which are excessively leveraged. The advantage of fiat is outweighed by a larger disadvantage. Which is that inevitably more and more currency is issued based upon future production which is unlikely to occur in a realistic time-frame.

Enter Bitcoin.

Consider: IntrinsicValue =  PriorWork * Scarcity * Utility

Bitcoin and its blockchain satisfies all three above. The prior work is mostly computational, but also has an intellectual component in the design. It has scarcity, via controlled and limited issuance. It has enormous utility because it supports remote payments (unlike gold).

The Bitcoin network is a return to a hard-currency system with intrinsic value which is a much more sound basis for a world economy, removing distortions and rewarding real productivity. Because it leverages the power of the Internet it has every chance of superseding failing fiat systems. Banks would be forced into a sound model: "one bitcoin of lending to one bitcoin of capital."

[xxjs]

I disagree with those who loosely state that bitcoins have no intrinsic value.  Bitcoins have the ability to transfer economic value to a designated address anywhere in the world practically at no cost and it can do so almost instantly.  No other commodity, that I know of, has this ability.  I expect the perceived value of this unique capability to increase dramatically as people come to recognize more and more productive uses for this new means of unparalleled economic efficiency.

But this is exchange value, not intrinsic value. Exchange value is the value of moneyness, the usefulness of the money in indirect exchanges. Intrinsic value is the value except for its moneyness.

[xxjs]

I want to turn this question around, and ask what does bitcoin back? What other money has value because it is backed by bitcoin?

Historic reference: Gold backed money was used because the public did not trust paper money sufficiently, as they were accustomed to banks going bust leaving its banknotes valueless. Gold backed paper money could be trusted more, because for each note there was a correspondig mass of gold in the note issuing bank. Some old money units was mass units, for instance the mark.

Gold backing is not as good as gold, as history has shown. The fall of the money starts when the banks issue more notes than they have of the gold in store. This can go on for some time, since, as long as the public believes and experiences that the bank pays out gold for the notes, they trust them. But as soon as more notes are issued than the reserves, the money is risky even when they are gold backed. Then of course, they are suddenly not gold backed anymore. Nowadays there are no gold backed money.

In the future, bitcoin backed money can emerge. Here are two possible examples:

1. Gift cards. Some people regard gift cards as being part of the extended money supply, sometimes called M4. To be precise, a gift card is a note issued by a merchant chain saying the holder of the card can pay with the card for purchases in the store. Gift cards are denoted in bitcoins and backed by the store, either the stores money balance or its goods. This normally works well, but if the store or the chain goes bust, the cards are valueless. The point with gift cards is that giving money outright is not socially acceptable outside the family, but gift cards can be.

Some gift card systems are electronic, just like a prepaid debit card, you can use it multiple times in the store until the balance is exhausted.

2. Extend this system, so that it is issued by a separate company that have a money capital of bitcoins, and the cards are accepted at not only a single store or chain, but all merchants, and you have a new form of money. They would mimic todays fiat denoted debet cards. They could be fully backed, where the issuer has all the bitcoins that is the sum of all the card balances. Such a card could be more useful than a bitcoin wallet applications, with replacement of lost cards and chargeback possibilities for example. An agreement could be made with owners of the current terminal systems, in that case the user would have access to millions of stores from day one.

In these cases you could say that you have new types of money, backed by bitcoins.

[Bitcoinpro]

the I.T. community

[Polvos]

I say it's backed by math not gold and math is better then gold because:

• Smiling lying bastards in silk suits can't deceive you about the amount of your math in the vault
  
• The Govt can't reach up it's ass and pull out tons of math to give to the pigs on Wall Street, thereby debasing your math.
  
• Burglars can't swipe your math while you're at the movies.
  
• The 'we buy your math' creeps won't offer you peanuts for your math
  
• Your math really is math and not tungsten with a math coating
  
• And most important - The Govt can't send men with guns to take your math
  

I would like to add:

- Government and other burglars can't use a metal detector to find your math hidden in a wall brick.

- There are no laws banning you from moving more than 10.000 maths between borders.

- Math doesn't jingle while you are walking, puting a big bullseye over your head.

[becoin]

• Your math really is math and not tungsten with a math coating
  

Are you sure about that or you just believe in what you want to believe in? Did you check all the math yourself or you just prefer to believe in what tungsten mathematicians tell you?

[iCEBREAKER]

What's backing up the US Dollar? or other currencies for that matter?
it's offer and demand, the more BTC is accepted and recognized worldwide, the more demand for BTC. The more people believe in the currency, the more support and more value. People call it a pyramid scheme because the early adopters got to make more BTC by mining them, but regardless of that, the total distribution will eventually start to even out.
My concern is what happens with the "lost money" The US dollar can be re-printed, but BTC can't.. so wouldn't be BTC eventually run out? meaning, there's always people losing their BTC by not backing up a wallet, HDD crashes, etc, etc... so those BTC cannot be reclaimed can't they?

The US dollar is backed by oil.  Saudi Arabia, Kuwait, and the other paper statelets only accept US dollars, so you must first buy dollars in order to buy their oil.

This regime is coming to an end, as explained in one of Ron Paul's finest speeches, The End of Dollar Hegemony.
https://www.youtube.com/watch?v=44wo8IhuHfQ

Don't worry, we cannot "run out" of Bitcoins.  The available supply will merely become more valuable, and the market will simply use substitutions like LiteCoin.

And here is the Big Diagram of What Backs What (Including Bitcoin):



Hopefully this will eliminate some of the boorish narrowmindedness, FUD, and confusion in this thread and replace them with conceptual clarity.

There’s been all kinds of speculation about what Bitcoin is and how it works. What about where it fits, in our insane, worldwide dynamic?

Since many of the same arguments involving Bitcoin have applied to gold as well, such as debate over whether either of them are commodities or currencies, let’s just classify them by their most basic properties.

Gold is a physical element. Bitcoin is an abstract protocol.

On one hand, gold can act as currency, but it can never be a purely abstracted item. From the other side, Bitcoin has functioned similar to a commodity, but it will never have a true physical presence.

Now, the currently assumed position of gold is at the very base of the financial world, according to John Exter. This representation can be seen in updated form with Trace Mayer‘s version of Exter’s Pyramid.

This is a powerful concept, highlighting the basis of financial development and gold’s role as the supreme intermediary between the abstract and real components of an economy. What’s curious is that gold is the closest thing to a purely independent financial instrument – it is an approximation of a monetary ideal. In other words: human utilisation of gold has placed it in a position where it straddles the two worlds of abstract monetary concepts and real, physical objects.

Enter Bitcoin. The structure of this phenomenon is such that it is functionally similar to gold, but has no absolute corporeal presence. Its abstract, intangible nature secures it firmly in the monetary realm. This means that a shift in thinking may be in order, adjusting the arrangement of Exter’s Pyramid yet again.

http://web.archive.org/web/20120502132636/http://bitcoinmedia.com/gold-is-a-physical-element-bitcoin-is-an-abstract-protocol/

Now isn't that better than screaming at people in GIANT RAGE FONT and insisting they don't understand what 'backed by' means?   

[thefiniteidea]

I have to say that was a really cool image and a great visual correlation, I could write a whole essay on that one picture! Thank you for sharing.

That said, I would revise a couple things though.



Really great either way!

Thanks again for sharing!  

[Bitcoinpro]

• Your math really is math and not tungsten with a math coating
  

Are you sure about that or you just believe in what you want to believe in? Did you check all the math yourself or you just prefer to believe in what tungsten mathematicians tell you?

i been known to study maths and IT now and then