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Author Topic: There is no backing for Bitcoin, and there needn't be.  (Read 3601 times)
evoorhees
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July 22, 2011, 04:31:30 PM
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The concept of "backing" is misplaced.

Commodities do not need to be "backed"... they are in and of themselves valuable because they are useful and scarce. Rice is not backed by anything. Gold is not backed by anything. Copper and pork bellies and sand... none of these are backed by anything. Yet they all have market values based on supply/demand.

Similarly, Bitcoin is a commodity. It is a "digital" commodity, true, but that doesn't make it any less "real" than any software. Photoshop is real. Firefox is real. The digital porn your have on your hard drive is real. (interestingly, it seems Bitcoin is the first true scarce digital commodity, because it can't be replicated by copy and pasting- it is genius for this reason alone if nothing else)

As a scarce commodity, Bitcoin doesn't need to be "backed" by anything. It is valuable as its own thing. Just as with gold and pork bellies, Bitcoin is valuable to the extent people want it.

Where "backing" is required is in a case such as paper money or any kind of "certificate." The paper, or certificate, itself is worthless. But, dollars had value originally because the paper was backed by a real commodity (gold or silver). It has value now because it's "backed" solely by the guns of the US Government. Citizens are forced to pay taxes in Dollars, and forced to accept dollars in trade. Sadly, it is violence and coercion that backs the USD now, instead of valuable metal. If dollars were not backed by the coercion of government, they would be worthless. Thus, their backing is necessary for their value. Not so for gold and butter and bitcoins.

So with Bitcoin, it doesn't need backing of any kind. The Bitcoin protocol is valuable as a commodity. If you think it's worth more than current market price, then buy it. If you think it's worth less, then don't buy it.  But either way, don't spread the silly notion that it requires backing - and that the backing comes from "energy consumption" or "cryptography" or other such nonsense.

There is no backing for Bitcoin, and there needn't be.
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Stephen Gornick
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July 22, 2011, 08:29:00 PM
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don't spread the silly notion that it requires backing - and that the backing comes from "energy consumption" or "cryptography" or other such nonsense.

Excellent post.  Though I'm going to question your meaning with that cryptography statement.

I trust Bitcoin because I trust the cryptography it uses, and the potential for a remedy should our trust in the current implementation be put in doubt, for example, as Gavin describes here:
   http://blog.ezyang.com/2011/06/the-cryptography-of-bitcoin/#comment-2590

Because data can have multiple copies, Bitcoin is not exactly like a scarce commodity.  Only through cryptography does Bitcoin emulate one.

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July 22, 2011, 11:06:22 PM
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Bitcoin is backed by the fact that people see value in it compared to other things.
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July 23, 2011, 12:54:30 AM
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don't spread the silly notion that it requires backing - and that the backing comes from "energy consumption" or "cryptography" or other such nonsense.

Excellent post.  Though I'm going to question your meaning with that cryptography statement.


Cryptography is obviously integral to Bitcoin's value - Bitcoin would be worthless if the cryptography weren't so elegant or if it failed. But, that is wholly different than saying the value of Bitcoin is "backed" by cryptography. "Backing" has a specific meaning when it comes to monetary instruments.
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July 23, 2011, 01:15:01 AM
 #5

The Bitcoin protocol is valuable as a commodity. If you think it's worth more than current market price, then buy it. If you think it's worth less, then don't buy it.

It's important to distinguish between the protocol and the units of currency themselves.  The protocol, like Firefox, is not scarce but the units of currency are.  The protocol is useful (particularly in keeping track of the units of currency), but the units of currency themselves do not have any utility other than to induce someone to provide something in exchange for them (unlike rice, oil, copper, etc., which can be eaten, burned, or made into useful products).

Yes, bitcoin has both utility and scarcity.  The protocol has utility and the units of currency have scarcity.
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July 23, 2011, 01:18:47 AM
 #6

Yea! The 1000th Bitcoin has no backing thread!

For the 1001th time. Yes it does.

"Backing" is a valuable consideration that would support a simple contract. Third party authentication is a valuable consideration, ask any notary public.
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July 23, 2011, 03:46:09 AM
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The concept of "backing" is misplaced.

Commodities do not need to be "backed"... they are in and of themselves valuable because they are useful and scarce. Rice is not backed by anything. Gold is not backed by anything. Copper and pork bellies and sand... none of these are backed by anything. Yet they all have market values based on supply/demand.

Similarly, Bitcoin is a commodity. It is a "digital" commodity, true, but that doesn't make it any less "real" than any software. Photoshop is real. Firefox is real. The digital porn your have on your hard drive is real. (interestingly, it seems Bitcoin is the first true scarce digital commodity, because it can't be replicated by copy and pasting- it is genius for this reason alone if nothing else)

As a scarce commodity, Bitcoin doesn't need to be "backed" by anything. It is valuable as its own thing. Just as with gold and pork bellies, Bitcoin is valuable to the extent people want it.

Where "backing" is required is in a case such as paper money or any kind of "certificate." The paper, or certificate, itself is worthless. But, dollars had value originally because the paper was backed by a real commodity (gold or silver). It has value now because it's "backed" solely by the guns of the US Government. Citizens are forced to pay taxes in Dollars, and forced to accept dollars in trade. Sadly, it is violence and coercion that backs the USD now, instead of valuable metal. If dollars were not backed by the coercion of government, they would be worthless. Thus, their backing is necessary for their value. Not so for gold and butter and bitcoins.

So with Bitcoin, it doesn't need backing of any kind. The Bitcoin protocol is valuable as a commodity. If you think it's worth more than current market price, then buy it. If you think it's worth less, then don't buy it.  But either way, don't spread the silly notion that it requires backing - and that the backing comes from "energy consumption" or "cryptography" or other such nonsense.

There is no backing for Bitcoin, and there needn't be.


Yes, well put. It really pisses me off whenever someone complains that bitcoin isn't "backed" by anything and gold is, for example. People often bring up physical industrial use-value as the thing "backing" precious metals. That's crap. The vast majority of the current market value of gold, platinum, even silver, is due to scarcity and other non-industrial-demand factors; the exact same factors that drive bitcoin. I'd further argue that bitcoin should be inherently more valuable due to its ease of transaction properties, but gold folks would counter that you can't physically hold it, so when the internet explodes you're f'ed. Fair point, but irrelevant due to really low probability.

Bitcoin is the first monetary system to credibly offer perfect information to all economic participants.
But Bitcointalk & /r/bitcoin are heavily censored. bitco.in/forum, forum.bitcoin.com, and /r/btc are open.
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evoorhees
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July 24, 2011, 02:24:38 AM
 #8

Yea! The 1000th Bitcoin has no backing thread!

For the 1001th time. Yes it does.

"Backing" is a valuable consideration that would support a simple contract. Third party authentication is a valuable consideration, ask any notary public.

I'm going to guess you didn't even read the OP =)  "Uses" of something do not "back" that thing's value. Gold can be used to create jewelry... but it is misguided to say that usage in jewelry "backs" gold's value. Nothing backs gold - it is a thing in and of itself. Bitcoins are the same, nothing backs them, and nothing need back them for them to be valuable.
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July 24, 2011, 04:07:15 AM
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Bitcoin IS backed.  It is useful because it is the only form of decentralized worldwide instantaneous payment.  That is a USE.  The fact that it can be used in such a manner, and be secure from fraud as it is, is amazing, and worth something in and of itself.  That combined with the fact that it takes WORK, computing power, to both create it AND to protect it from fraud, also give it backing.  And because it is USEFUL and takes EFFORT to create, it will always maintain some kind of INHERENT value to people, and thus always be used.  (It or others like it.)

People don't realize that Bitcoin is backed, because they don't really understand all the forms of backing which are possible.  Use is backing.  Work is backing.  Bitcoin is backed.

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July 24, 2011, 04:28:39 AM
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Previous thread explaining how bitcoin has a use just like rice does.

http://forum.bitcoin.org/index.php?topic=27223.0

indio007
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July 24, 2011, 04:59:18 AM
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Yea! The 1000th Bitcoin has no backing thread!

For the 1001th time. Yes it does.

"Backing" is a valuable consideration that would support a simple contract. Third party authentication is a valuable consideration, ask any notary public.

I'm going to guess you didn't even read the OP =)  "Uses" of something do not "back" that thing's value. Gold can be used to create jewelry... but it is misguided to say that usage in jewelry "backs" gold's value. Nothing backs gold - it is a thing in and of itself. Bitcoins are the same, nothing backs them, and nothing need back them for them to be valuable.

That's not a very good analogy. Using gold as jewelry is not a service. The nodes on bitcoin network provide a service. You need bitcoins to access that service. Therefore bitcoins are backed by the right to do mulitple third party authenticated transactions on the bitcoin network.

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July 24, 2011, 10:05:00 AM
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The first real scarce digital asset was domain names.

Some domainnames were bought for $10 and are now sold for millions of dollar.

They are not backed by anything. Except that they are useful.

Bitcoins are the worlds first internet cash.




Bitcoins - Because we should not pay to use our money
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July 24, 2011, 12:33:26 PM
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Bitcoin IS backed.  It is useful because it is the only form of decentralized worldwide instantaneous payment.  That is a USE.  The fact that it can be used in such a manner, and be secure from fraud as it is, is amazing, and worth something in and of itself.  That combined with the fact that it takes WORK, computing power, to both create it AND to protect it from fraud, also give it backing.  And because it is USEFUL and takes EFFORT to create, it will always maintain some kind of INHERENT value to people, and thus always be used.  (It or others like it.)

People don't realize that Bitcoin is backed, because they don't really understand all the forms of backing which are possible.  Use is backing.  Work is backing.  Bitcoin is backed.

That's not the type of backing people refer to when they talk about currencies being backed.

If use is the same thing as backing, then everything on the planet has backing (even FRNs can be burned) and there's suddenly no reason to discuss it because it's a universal trait.

Bitcoins are not backed in the way that most folks describe currency backing. It's not backed by gold. It's not backed by a basket of commodities. It's unbacked.

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In the future, books that summarize the history of money will have a line that says, “and then came bitcoin.” It is the economic singularity. And we are living in it now. - Ryan Dickherber
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July 24, 2011, 03:30:08 PM
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westkybitcoins is right.  Backing means that one thing (usually with little or no inherent value) can be redeemed for another thing of value, and this relationship gives the first thing nearly all of its value.

Backing has nothing to do with whether a thing can be used or spent.
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July 24, 2011, 06:40:25 PM
 #15

It's backed by 2 things: Mathematics and P2P network

Mathematics has almost become a religion in mordern time, and P2P network shows its resilience in the latest 10 years.

So if anything can break the trust of current cryptography or P2P network (for example a real powerful quantum computer), then the value of bitcoin will be shaked

evoorhees
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July 25, 2011, 04:21:08 AM
 #16

LOL I think many of you guys missed the whole point I was making. I never said Bitcoin wasn't useful - indeed I am one of its biggest proponents. Rather, I said that it's not backed by another commodity, because it's a commodity in and of itself. Similarly gold is very useful, and is not backed by anything.

Something requires "backing" only when it's not useful/valuable on its own accord... such as with fiat paper. Bitcoin doesn't need backing, because it's valuable by itself.

I'm just debating terminology here maybe... concepts such as "use" and "cost" and "value" and "backing" are all important, and I see lots of confusion of such terms here on the forums. The concept of "backing" does not apply to Bitcoin (nor any other commodity).
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July 25, 2011, 05:57:49 PM
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The fact that gold has other uses may serve to put a floor on the price of this commodity, but that is not where gold gets it's value. The value comes from it's usefulness in tracking transactions. Bitcoins is better at tracking transactions and acting as money, and still retains all the necessary requirements of money. If people stop using bitcoins, yes, the price would be $0. So if you afraid that bitcoin will stop being used, keep some of your gold around. If you are afraid gold will stop being used, keep some bitcoin around. Every monetary instrument is only as valuable as people who use it. It's not that hard dudes.

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