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Author Topic: Could BitCoin ever be backed by Gold?  (Read 5552 times)
ronaldmaustin
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December 30, 2010, 08:43:25 AM
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Could BitCoin ever be backed by Gold or some other commodity in the following fashion? And would it be desirable to do this?
Assume for the sake of argument that all 21 million coins were in circulation as of just today.  Suppose some rich reputable entity (Bill Gates or the Pope) bought up all bitcoins at market price (29 cents) for $6,090,000.   Some amount of gold is purchased, placed in a vault in Switzerland, and the coins are sold back to the public for some amount of money which the market will bear in such a manner that Bill or the Pope take no loss or gain.  Does that back the currency so that it is tied to the price of gold, similar to the way that everyone seems to want the US to have stayed on the gold standard?

Clearly I have not thought this through, but is there way to later back a fiat currency, or must it be done from the outset?  Further, is it desirable to do this?
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Bitcoin mining is now a specialized and very risky industry, just like gold mining. Amateur miners are unlikely to make much money, and may even lose money. Bitcoin is much more than just mining, though!
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davout
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December 30, 2010, 08:46:43 AM
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Gold will be backed by bitcoins someday.

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December 30, 2010, 08:46:48 AM
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Could BitCoin ever be backed by Gold or some other commodity in the following fashion? And would it be desirable to do this?

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

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caveden
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December 30, 2010, 08:56:54 AM
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No, it's not really desirable to do this.

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

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ronaldmaustin
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December 30, 2010, 08:59:18 AM
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Okay, funny.  And true.  I don't think Gold has any more inherent value than Bitcoins.  In fact, they may figure out how to make gold one day, but will never figure out how to make more bitcoins, so I do understand.  Let me tell you the genesis of the thought, though.  Wikileaks.  Some people want to give money to Wikileaks right now.  They could simply buy bitcoins at an exchange, using dollars or credit card, or whatever.  Wikileaks can then instantly cash the bitcoins back in whatever currency.  Suppose then the US government closes down the ability to trade in bitcoins for US dollars, or to purchase pre-paid Visa cards, etc.  The value of the bitcoin left to being the 15 people who accept it.  So unless Julian Assange wants a new VPN, or to look at porn, buy domain or web service (as I type this I realize bitcoins are probably pretty good for Julian :-) then Wikileaks is stuck.  If the currency is backed by gold, someone will pay regarless of how the authorities in the US and Europe try to regulate/terminate a competing internet currency.  Look what they did to e-gold.  But they can't shut down bitcoin . . . there's no one to put in jail.  All a government can do is try then to eliminate the backing of the gold in the Swiss bank (or whatever) to destroy the currency.  That's more or less why I thought about backing the currency.
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December 30, 2010, 09:00:21 AM
 #6

Gold will be backed by bitcoins someday.

I think that too and I whish I had said it clearer on this forum.
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December 30, 2010, 09:14:52 AM
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Could BitCoin ever be backed by Gold or some other commodity in the following fashion? And would it be desirable to do this?
Assume for the sake of argument that all 21 million coins were in circulation as of just today.  Suppose some rich reputable entity (Bill Gates or the Pope) bought up all bitcoins at market price (29 cents) for $6,090,000.
This is a misunderstanding.  The current market price for one bitcoin is around 0.29 USD.  If you want more than about 100 000, you are already paying 0.5 per bitcoin.  If Bill Gates and the Pope want my last bitcoin, they will have to part with their last dollar, and I will have my own state in the middle of Rome.  What you suggest is impossible.

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

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ronaldmaustin
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December 30, 2010, 09:20:42 AM
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Also, how is bitcoin a commodity?  Gold can be used for fillings, you can eat oranges, you can drink coffee.  Making something hard to get does not make it a commodity even though that is essential.  I only have so many nosehairs, but that does not make them of value to anyone.  Nor does my asking people to use my nosehairs as currency and a few people using them make them a commodity.  P2P currency has value due to what it can do and the setup of bitcoin is a great concept and happens to be working.  However in a currency with nothing tangible backing it, when faith in the currency fails, people stop accepting it.  When faith in a commodity backed currency fails, at least you can get your amount of coffee, oranges, gold or whatever.  What can I get with my bitcoin if people stop accepting it?  Right now, to me, the biggest thing the bitcoin has going for it right now is that I can get US Dollars (another essentially valueless money) for my bitcoin.  Towards that end, I mine it 24/7.  And I'm glad the profit is very very marginal, or I would not have faith in it myself.  I do have faith in the bitcoin.  But when governments begin to crack down, or the dollar begins to falter, I wish I was holding some currency that is backed by something I, or someone else, can eat, drink or fill my teeth with.  An alcohol based commodity would be great to back the bitcoin.
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December 30, 2010, 09:31:37 AM
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Assume for the sake of argument that all 21 million coins were in circulation as of just today.  Suppose some rich reputable entity (Bill Gates or the Pope) bought up all bitcoins at market price (29 cents) for $6,090,000.   

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

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

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

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ronaldmaustin
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December 30, 2010, 09:31:44 AM
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sturle, I don't understand the response.  Why could any person with a few million dollars not buy all of the bitcoins in existance?  Is your last bitcoin worth more than Bill Gates can offer you?  Are you really going to hold out for a state in Rome?  Would you not settle for a new XBOX 360 for that last bitcoin?  How about a lapdance?  I do not know whether it is impossible to back a currency after it has been issued, as you say it is.  That is, after all, my question.  The posters on here may realize the value of a bitcoin.  I do.  I think it is a great currency for quick, easy, secure anonymous transactions.  But try explaining to any of your friends how you will loan them bitcoins or give them as a gift and see how fast people tell you to shove it.  Tell them they can cash them in for dollars and they'll snatch them right back.  Tell them they can be arrested by the US Government if they spend them anywhere and they will be hesitant.  But if they may be able to trade them for gold somewhere, they may just keep them somewhere on their computer for a rainy day, regardless of what Uncle Sam tells them they can and cannot do.
ronaldmaustin
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December 30, 2010, 09:39:00 AM
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FreeMoney, I understand the hyperbole.  But you would sell your bitcoin for a Billion Dollars.  You would likely sell a bitcoin for $1000, probably even $100.  You seem to imply that the last bitcoin is worth some outrageous sum of money.  Or that the price will rise astronomically if someone tries to buy them all.  Why?  Regardless, whether someone buys all of the bitcoins is not the issue.  One would not even need to buy them all to back them by a contract for gold.  True, the backing is only as good as the contract.  That is why even if you completely trusted e-gold, it still doesn't matter because the US Government destroyed the contractual relationship.  So I picked a Swiss Bank for my example, but it could be any entity that people trust to deliver an amount of a given commodity like coffee for one bitcoin.  It is the difference between a currency backed by something, and a currency like the dollar backed by nothing.
grondilu
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December 30, 2010, 09:39:22 AM
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Cornering a market is not that easy.  See the Hunt brother's story.


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

Basically this would mean a turn back to a centralised monetary system.  Bitcoin advocates don't want that.  Neither do gold ones.
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December 30, 2010, 09:43:43 AM
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I was going to say exactly what grondilu said. Trying to make such a "backing" introduces centralization. The backing institution could be taken over by governments. It doesn't really add safety, and I don't see any economic incentive for such institution to do such backing.

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ronaldmaustin
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December 30, 2010, 09:48:55 AM
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Okay, I just got 100 sand dollars off of my beach that each have a really unique pattern.  In fact, they just washed in with a rare tide that happens every 100,000 years and I think I got them all.  The local kids will sell you lemonade for 1 sand dollar a cup.  I bought five cups, so the kids have five of them.  My maid really likes the shells and she cleaned my house for 5 of them.  I'm not going to tell you what my girlfriend did for the other 40, but she want's more and there just aren't any.  Oh, wait, here's the other 50.  Does anyone want to buy them.  They are not currency.  They ARE the commodity because I had to work real hard to find them and they shine up really nicely.  You can get lemonade, your dishes done, and god knows what my slut girlfriend will do for 50 shells, given what she did for 40 shells.  We are all out here in California, so all of the 3 services are available locally.  Any takers?  I heard the kids want a billion dollars for the last shell though.
ronaldmaustin
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December 30, 2010, 09:51:14 AM
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grondilu and cavaden, good answer.  And food for thought.  But is a currency that is backed by something worse than one backed by nothing, simply because someone can take the backing away? 
caveden
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December 30, 2010, 09:51:47 AM
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This feeling people have that money should be useful for something else has already been discussed here in other topics.

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

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grondilu
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December 30, 2010, 09:55:24 AM
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Okay, I just got 100 sand dollars off of my beach that each have a really unique pattern.  In fact, they just washed in with a rare tide that happens every 100,000 years and I think I got them all.  The local kids will sell you lemonade for 1 sand dollar a cup.  I bought five cups, so the kids have five of them.  My maid really likes the shells and she cleaned my house for 5 of them.  I'm not going to tell you what my girlfriend did for the other 40, but she want's more and there just aren't any.  Oh, wait, here's the other 50.  Does anyone want to buy them.  They are not currency.  They ARE the commodity because I had to work real hard to find them and they shine up really nicely.  You can get lemonade, your dishes done, and god knows what my slut girlfriend will do for 50 shells, given what she did for 40 shells.  We are all out here in California, so all of the 3 services are available locally.  Any takers?  I heard the kids want a billion dollars for the last shell though.

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

Your sand dollars kind of look like diamonds.  Diamonds are precious.  But they are not money.
ronaldmaustin
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December 30, 2010, 09:58:37 AM
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In other words, sure, there is always some trust there that someone is going to deliver, the bank or entity holding the commodity is not going to get robbed or explode.  But pick the safest alternative reasonably possible and go with MAYBE getting your gold or coffee for your bitcoin in the worst case scenario, rather than getting nothing if 15 people stop accepting bitcoins.  As to the Hunter Brothers and silver, yes, I remember that.  But it is one hell of alot easier to buy up all of the bitcoins that all the gold or silver in the world.  Simply put, I think bitcoins would have wider acceptance if someone gave something for them that people want.  Right now, people are not quoting the price of bitcoins in terms of VPN service or Web Hosting (or the other 3 or four tangible things you can actually buy).  They quote the price in US Dollars.  Fine, great.  But the US is poised to kill that in a hot second just like e-gold if people start using bitcoins.  They won't like the anonymity and they will say bitcoins supports terrorism.  When the US does that, and MTGox says Bitcons are worth x days of VPN service, instead of 30 US cents, the bitcoin will be dead.  If it is backed by a promise of a credible entity for a tangible good that can be sold somewhere, the bitcoin will live on regardless of what the US does, unless the us can get to the holder of the goods in some way.
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December 30, 2010, 10:00:33 AM
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FreeMoney, I understand the hyperbole.  But you would sell your bitcoin for a Billion Dollars.  You would likely sell a bitcoin for $1000, probably even $100.  You seem to imply that the last bitcoin is worth some outrageous sum of money.  Or that the price will rise astronomically if someone tries to buy them all.  Why?  Regardless, whether someone buys all of the bitcoins is not the issue.  One would not even need to buy them all to back them by a contract for gold.  True, the backing is only as good as the contract.  That is why even if you completely trusted e-gold, it still doesn't matter because the US Government destroyed the contractual relationship.  So I picked a Swiss Bank for my example, but it could be any entity that people trust to deliver an amount of a given commodity like coffee for one bitcoin.  It is the difference between a currency backed by something, and a currency like the dollar backed by nothing.

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


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December 30, 2010, 10:01:23 AM
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I'm a buyer on the day the government says bitcoin supports terror for sure. That's going to be a huge pop.

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