How we could "back" bitcoins with something of value

[Shuffle]

1 bitcoin should be worth 1 gram of high quality weed

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[Richard Andreassen]

I agree that bitcoins need to be backed by something.

To me this means that bitcoins need to be readily convertible into the thing backing them.

Not necessarily. The idea of "backing" a currency is actually a bit of a misconception. All that is needed is to regulate the supply of the currency so that the price is at par with the value of the commodity you are using as the standard of value.

The problem I see is making it decentralized.  With a single choke point a government can shut the whole thing down, which defeats the purpose.  Physical metal is excellent in terms of decentralization because it's impossible to track and impractical to confiscate, but it doesn't travel over the internet very well.

I think this is possible, since we don't need any actual physical metal. All we need is the exchange rate between the metal and bitcoins. I have some ideas about how this exchange rate can be used to adjust the supply of bitcoins in a completely decentralized manner.

[blogospheroid]

If you truly want to setup an awesome post nation state backing, you would buy up a small amount of land everywhere in the world and setup warehouses holding any material that you want to back up bicoins with. You can divide the total amount by 21 million and publish the amount.

[5grainsilver]

The ONLY value bitcoin has is whatever nominal figure a large group of people can agree on.  If they decided tomorrow that it was zero, that would be that.  Precious metals on the other hand have real uses and properties that can't be replicated by another "system".  If silver dropped to low prices tomorrow it would be hoarded by companies with legit commercial use for it.  Bitcoin is completely different.    

Don't get me wrong I think bitcoins are a great idea and as a merchant I would love it if everyone paid me in it.   I think bitcoins as a payment method is its biggest strong point and the angle the bitcoin community should really be focusing on.  The whole store of wealth idea just isn't based in reality.  Its entire value IMHO will come from its use as a payment method.  

[hugolp]

1. Backing Bitcoin would require a central authority and being decentralized is one of the key characterisitcs of Bitcoin. Without decentralization Bitcoin would loose value, not gain it.

2. If you still think its a good idea, you can go and start goldcoins, silvercoins, ricecoins or dollarcoins. Let the market decide which one it prefers. But I would take a good look at what happened to Liberty Dollars.

Gold has unique physical properties.  It "backs" itself. 

Backing btc requires a central organization to implement, which defeats the purpose of btc.

Bitcoins also have some physical unique properties. It "backs" itself, as its price its showing.

[royalecraig]

bitcoin backs itself, the only reason why the USD ought to be backed by Gold is to stop Gov and central bankers cheating, by printing more money.
Since no one can print more bitcoins, it doesn't need backing, total transparency is what backs it and that is as good as gold.

[Richard Andreassen]

1. Backing Bitcoin would require a central authority and being decentralized is one of the key characterisitcs of Bitcoin. Without decentralization Bitcoin would loose value, not gain it.

2. If you still think its a good idea, you can go and start goldcoins, silvercoins, ricecoins or dollarcoins. Let the market decide which one it prefers. But I would take a good look at what happened to Liberty Dollars.

I think it would be a great idea to start something like goldcoins, that keeps their value stable against gold. It wouldn't be necessary to have any physical backing or central authority to do this.

Let me suggest a very crude way to do this:

Instead of having a predefined rate of growth in the number of coins, the difficulty of mining coins could depend on the exchange rate between goldcoins and gold. So let's say we set the target exchange rate at 1 gold coin for 1 gold gram. When the price of goldcoins rises above 1 gram mining becomes easier, increasing the supply of goldcoins until the price comes back down to the parity level. When the price of goldcoins are at 1 gram of gold or lower, mining new coins should be virtually impossible so that no new coins are mined until demand picks up.

Whenever the price falls below parity speculators could make a profit by hoarding goldcoins at the reduced price and then selling them again when the price comes back up. This would increase the demand for goldcoins and drive the price back up to the parity level.

This should basically be enough to keep the value of goldcoins stable against gold. I do also have some ideas that I am working on about how to make the mechanisms for keeping the value stable more efficient and less likely to fail. 

[GideonGono]

While I am sympathetic to ideas of wanting to "back" btc with something, it is impossible to do without some degree of centralization which is unacceptable. For instance, if your proposal were to be adopted it would effectively mean that miners have to pay for your backing plan. So essentially miners are supposed to pay into a "when sh*t hits the fan" fund that will benefit everyone at their expense.

Furthermore, your plan gives an unfair advantage to Mt Gox. Why should they benefit from the guaranteed volume as a result of processing the "back btc auction"? Can we even trust Mt Gox since they came out the other day saying they will hand over details of peaceful people who freely exchanged goods to the thugs who call themselves the DEA.

Who is going to take the role of uncle sam and redistribute wealth from miners to Mt Gox & "society"?

I think this post is a great insight into how socialism begins. The reason you are able to make such a proposal is that you don't have to pay for it. Otherwise you'd just "back" btc yourself at your price with your money.

[alexbasasa]

I propose backing BitCoins with their own awesomeness.

[vector76]

There is a difference between backing and pegging.

Backing means that the holder is guaranteed something of hard value, which traditionally requires a promise by a central authority in the case of paper money.  The guarantee of hard value is only as good as the word of the central authority, which may or may not be good depending who that is.  Coins that contain metal themselves, such as silver dollars, are guaranteed value because if the value AS CURRENCY falls, then they still have the metal which they could melt down and use as bullion.  The holders of silver dollars do not need to depend on anyone's promise.  The backing is decentralized.

Bitcoins do not back themselves because they have no use other than currency.  You cannot use them except to spend them, and you cannot spend them without someone else accepting them.  Silver dollars and copper pennies have non-monetary value because you can melt them down and you have metal which has industrial uses.  Bitcoins do NOT have this type of value.

Pegging a currency means manipulating the market to maintain a certain exchange ratio.  Traditionally it's been governments who buy or sell currency to maintain the desired exchange ratio.  Governments LOSE MONEY when they peg a currency.  But they deem it worthwhile to maintain confidence and stability.  Because it's a money-losing proposition, market participants are not in a position to peg a currency.  Hoping that speculators will effectively peg a currency at a certain ratio is the same as hoping that the market in general will peg a currency.  Not going to happen.

Through mining, you can flood the market with new currency if its value rises above a certain level, but there is no mechanism to contract the quantity of money if its value falls.

Protection against rising value is not really protection (except for borrowers I suppose).  Falling values are really what you need to protect against, to give people confidence that their currency holdings won't be wiped out.

[Richard Andreassen]

There is a difference between backing and pegging.

Not Really. The market value of a currency is merely a function of the supply and demand of that currency. The "backing" only really comes into play when the demand for the currency falls, so that the price can be supported. The classical gold standard was basically a currency peg to gold.

Bitcoins do not back themselves because they have no use other than currency.  You cannot use them except to spend them, and you cannot spend them without someone else accepting them.  Silver dollars and copper pennies have non-monetary value because you can melt them down and you have metal which has industrial uses.  Bitcoins do NOT have this type of value.

Agreed.

Pegging a currency means manipulating the market to maintain a certain exchange ratio. 

I don't think pegging a currency is a matter of manipulating the market. It's just a matter of managing the supply. The price is at all times set by the market.

If you are issuing a currency, there must be some supply of it. To say that a fixed supply, or a supply growing at a constant rate is somehow more "free market" than a supply that varies with demand is just silly.

Because it's a money-losing proposition, market participants are not in a position to peg a currency.  Hoping that speculators will effectively peg a currency at a certain ratio is the same as hoping that the market in general will peg a currency.  Not going to happen.

How exactly, is it a money-losing proposition? You buy when the price is low, and sell when the price is high. Sounds to me like a way to make money.

Through mining, you can flood the market with new currency if its value rises above a certain level, but there is no mechanism to contract the quantity of money if its value falls.

Protection against rising value is not really protection (except for borrowers I suppose).  Falling values are really what you need to protect against, to give people confidence that their currency holdings won't be wiped out.

I agree that this is a challenge, but if no new currency can enter the market while the price is suppressed, and you expect demand to pick up in the future, there is an incentive to buy more of the currency when it is low. I have a few ideas that I am working on about how to make this mechanism more reliable.

Also, when there is an effective ceiling on the price of the currency, no one would hoard the currency in order to profit from appreciation above this level. Only people who actually wanted the currency as a medium of exchange would want to buy the currency at its parity price. So there could never be a speculative bubble in the currency. This would make sudden falls in demand less likely.

[bustaballs]

Bitcoins could be "backed" by someone voluntarily.  I could, for example, say that no matter what happens, I'll always offer at least at least 5lbs of coal per BTC.

Something that isn't being manipulated by a central authority has no need for a backing. But it "could" be backed without any government or central bank so long as the volunteer follows through with his promise.

[vector76]

Backing and pegging are similar in that they both influence the price.

Backing protects the value from falling but it does not prevent the price from rising.  Pegging stabilizes the value in both directions.  Backing also does not require active intervention in the market, as demonstrated with silver dollars.  The backing is connected to the currency when it is created.  Pegging requires active management over the lifetime of the currency.  Whether this is manipulation or "free market" is somewhat beside the point.  What matters is if it's practical and trustworthy.

As I said, a ceiling is fairly straightforward to implement to prevent the price from rising.  You could instill great confidence that the value will not rise above a certain level.  But this is not the purpose of backing, and it is only half the purpose of a peg.

How to provide a price floor?  Preventing bubbles will reduce volatility but it will not provide a minimum value.

if no new currency can enter the market while the price is suppressed, and you expect demand to pick up in the future, there is an incentive to buy more of the currency when it is low.

The problem is precisely falling value when there is not an expectation that demand will pick up.

There is also a confusion between supply as interpreted as the rate of money creation, and the supply as interpreted as the amount of existing money.  The rate of money creation can be curtailed to zero, but the amount of money in existence won't shrink.  If the amount of currency that people want to hold is less than the amount that exists, then the value will fall.  Stabilizing the value with variable creation only works when the demand for existing money is growing.

If the demand for money is shrinking and there is not an expectation that the value will go up, then there is not money to be made by gobbling up all the excess currency at an above-market rate, holding it until the price exceeds parity which is expected to be never.  Markets do not peg currencies automatically because currency peg must by nature oppose the market.

[Richard Andreassen]

Backing and pegging are similar in that they both influence the price.

Backing protects the value from falling but it does not prevent the price from rising.  Pegging stabilizes the value in both directions.  Backing also does not require active intervention in the market, as demonstrated with silver dollars.  The backing is connected to the currency when it is created.  Pegging requires active management over the lifetime of the currency.  Whether this is manipulation or "free market" is somewhat beside the point.  What matters is if it's practical and trustworthy.

Under a system of backing the price is usually prevented from rising by people bringing gold or some other asset to the issuer in exchange for new money.

The difference between backing and pegging is only whether the supply of currency is managed actively or passively.

The problem is precisely falling value when there is not an expectation that demand will pick up.

I agree that this is a potential problem. The assumption would have to be that the demand for currency tends to grow over time. This is generally true, but not guaranteed.

A potential solution I have been thinking about is that exchanges would provide special accounts for arbitraging the dips in the currency. The buying and selling on these accounts would be automated and not subject to discretion, so that they would always buy below parity and sell at or above parity. Also the money would have to be unaccessible for a while (say 30 days at a time) to prevent people from panicking and closing their account on a drop in demand.

There would of course have to be some special benefits to having such accounts if anyone should be expected to take the risk. This could be priority in the bidding process, so that these accounts would be first in line to buy whenever the price drops below parity, and lower or no transaction fees. Transaction fees on the buying and selling of others could perhaps even be awarded these accounts as a payment for their risk taking if a larger incentive is needed.

Generally speaking such an account would generate profits, but you would risk losing the money if the currency still fails.

I must stress that this is still just an idea that I am playing with, and I am not yet certain whether this would be viable or not. 

[BitCoinsForGold]

I am doing my best to back bitcoins with gold and silver, check out my post

http://forum.bitcoin.org/index.php?topic=19763.0

I know that it may take a while, but i think over the next few months I will be able to establish myself greatly here and give people a real and viable alternative use for their bitcoins in a real world environment. I'm also able to answer any gold and silver questions anyone may have

[iya]

@Richard Andreassen

The problem with modifying supply based on an exchange rate is:
Which exchange rate to use? For example, when Bitcoin was created, there were no exchanges around.
It would introduce a lot of uncertainty in the design.

@BitCoinsForGold

Unfortunately you are in no position to control a peg. I can guarantee that you either won't sell anything or make a heavy loss.

[BitCoinsForGold]

I've already sold some tyvm.

And on top of it, what I was saying, is that whenever you're...

buying something
selling something
or even trading currency

... for bitcoins, your backing it.

There's only a few things that make things "money"

Widespread acceptance (bitcoins working on it. But between all current available options your getting basics covered)
The inability to spend the same unit 2x at once (done)
That each unit is divisible equally, and that all equal parts total to original part with no loss (bitcoins do this, diamonds for example, dont)

The more things you can buy and sell and trade with bitcoins the better.
And everything from cash, to gold, to silver, to atm cards, to bdsm clubs in ny, to raman noodles, id say bits are doing a good job.

[kwhcoin]

...It's easy to confuse these things, of course, because Bitcoin is the name for both the software system and the currency used in that software system. The two should be understood separately, and the latter derives its original value from the former, and it's long-term value from the supply and demand of that original value...

Bitcoins also have some physical unique properties. It "backs" itself, as its price its showing.

I propose backing BitCoins with their own awesomeness.

Bitcoin as a concept/software brings value to people, and a lot of this value is currently reflected in the market price of bitcoins because there are currently no other Bitcoin-like currencies. In other words, there is a demand for the valuable Bitcoin concept/software in a currency and bitcoins are currently the only supply. However, many other Bitcoin-like currencies will come along and effectively increase the supply of currencies that can deliver the value of the Bitcoin concept/software. I believe the growth in supply of currencies offering Bitcoin-like properties will be able to greatly out pace the growth in demand for currencies offering Bitcoin-like properties. This is why I proposed this backing solution because I believe it is desirable to back the actual bitcoins with something of long term value rather than depend on the Bitcoin concept/software as the only foundation for the value of bitcoins.

[kwhcoin]

Backing btc requires a central organization to implement, which defeats the purpose of btc.

The problem I see is making it decentralized.  With a single choke point a government can shut the whole thing down, which defeats the purpose.

which decentralized entity would do this?  oh wait.  you?

1. Backing Bitcoin would require a central authority and being decentralized is one of the key characterisitcs of Bitcoin. Without decentralization Bitcoin would loose value, not gain it.

While I am sympathetic to ideas of wanting to "back" btc with something, it is impossible to do without some degree of centralization which is unacceptable...

I am under the impression that a team of open source developers already have the ability to modify the Bitcoin code to make the small coding changes necessary to implement my backing proposal, and if this is correct, then the “central authority is bad argument” can't be used against my proposal to modify Bitcoin because the “central authority” necessary to enact my changes already exists.

[Vinnie]

If YOU want to back Bitcoins, offer to sell some commodity at a fixed rate. Why make it more complicated than that?

I've advocated someone take this approach to a physical "bitcoin." Produce a hard to replicate token and make the market for it at a small percentage under and over spot.