"Backing" - what does this actually MEAN?

[pand70]

All that backed by cryptography or mathematics are just slogans. Actually bitcoin it is backed only by the community and the people that are using it. Hopefully that community will be the entire world at some time  

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[Impaler]

Fiat currency is backed by the threat that if you don't have some to give to the government when they want it, you go to jail.

The US dollar is a promise that you can redeem it - for dollars.

Exactly, a dollar is a bearer bond that can extinguish a Dollar of DEBT, debt in the form of taxation is a big part of that, but also legal tender laws mean ANY private debt can also be extinguished by the dollar.  So the dollar is the universal extinguisher of all debts in the U.S. and that is it's backing.

I've argue in other threads that the BTC computer network or even the cryptographic code of BTC dose not constitute backing for BTC, because it dose not establish any price or valuation for BTCs.  Instead all they do is try to provide limited security against theft, and prevent counterfeiting.  So while users can have some assurance they will still posses their BTCs in the future and that BTC will still be rare, theirs no guarantee they will be high priced in the future.

Also in response to an earlier statement that 'all goods exchanged or offered for sale for BTC' are a backing, this wrong for two reasons.  First all such merchants are free to remove these offers at any time, and second not one single merchant on Earth actually sets prices IN BTC itself, they always make use of the exchange rate and thus they do not act to fix a value for BTC because you can have no confidence that any quantity of coins will ever buy any amount of merchandise.

[codeneis]

I have a golden coin burried. A can divide this coin to the number of satoshis that can be mined. But you guys don't know where my coin is and I am to lazy to dig it again.

If someone asks, bitcoin is backed by gold. This sole coin that no one knows where it is.

[deisik]

All that backed by cryptography or mathematics are just slogans. Actually bitcoin it is backed only by the community and the people that are using it. Hopefully that community will be the entire world at some time  

Community doesn't stick to bitcoin just for the fun of it (though some may actually, but their number is small and economics is about rational decisions at that). They use it because they find bitcoin useful in some way, right? If so, what qualities provide that usefulness to them? 

[deisik]

I've argue in other threads that the BTC computer network or even the cryptographic code of BTC dose not constitute backing for BTC, because it dose not establish any price or valuation for BTCs.  Instead all they do is try to provide limited security against theft, and prevent counterfeiting.  So while users can have some assurance they will still posses their BTCs in the future and that BTC will still be rare, theirs no guarantee they will be high priced in the future.

It is not the BTC computer network or the cryptographic code of BTC as such that contribute or constitute backing for bitcoin (I think you refer here to our debate over this issue). It is usefulness (utility) they provide that influences subjective valuation. If you don't agree with this, it means that you don't consider these qualities of bitcoin useful, that's all. You just can't have it two opposite ways around at the same time...

[ToTheZeroth]

Fiat currency is backed by the threat that if you don't have some to give to the government when they want it, you go to jail.

The US dollar is a promise that you can redeem it - for dollars.

Exactly, a dollar is a bearer bond that can extinguish a Dollar of DEBT, debt in the form of taxation is a big part of that, but also legal tender laws mean ANY private debt can also be extinguished by the dollar.  So the dollar is the universal extinguisher of all debts in the U.S. and that is it's backing.

It might be added that in most jurisdictions, it's only the cash form of the currency that is legal tender. Most debts, of course, will be settled by other means, such as bank transfers, if the creditor and the debtor agree to this, but if they can't agree on a transfer medium, the debtor always retains the right to pay in cash. As most fiat currency nowadays is electronic, it's quite reasonable to say that the money in our bank accounts became backed by banknotes in much the same way that banknotes were once backed by gold or silver. And it has led to exactly the same result: since the new, "backed" medium is easier to work with, there is seldom any reason to exchange it back to the old, "backing" medium—at least not in large amounts. Knowing that it theoretically could be turned into something that others must accept is enough. And as it turns out in the end, the "backing" is subtly lost along the way.

This could happen with bitcoin as well (people having bank accounts denominated in BTC but not actually knowing that they will be able to withdraw to actual bitcoin), but bitcoin is different: first, it's easier for those who want to actually be their own bank, and second, it would be possible for a bank to prove that it holds the bitcoin to "back" the accounts. The real fear is that neither the government nor the customers would demand this of the banks.

[deisik]

Also in response to an earlier statement that 'all goods exchanged or offered for sale for BTC' are a backing, this wrong for two reasons.  First all such merchants are free to remove these offers at any time, and second not one single merchant on Earth actually sets prices IN BTC itself, they always make use of the exchange rate and thus they do not act to fix a value for BTC because you can have no confidence that any quantity of coins will ever buy any amount of merchandise.

What matters here are actual purchases made in Bitcoin, It doesn't matter whether merchants are free to remove these offers at any time (as if they couldn't do just the same at will in the case they decided to tag their prices in dollars) or they don't set prices in Bitcoin itself. Price is determined by actual exchange taking place between people and not by what they ask for or bid on (an example showing falseness of such logic)...

[teukon]

Bitcoin is not issued therefore it is not backed.  Bitcoin's lack of central authority is a strength, not a weakness.

For an established currency, a backing is a liability.  The backing tells us that some part of the value or stability of the currency is dependent on the promise of some entity.  What would happen if that entity were to break the promise? (see: Nixon Shock)

If Bitcoin can establish value and stability without a backing, more power to it.  If Bitcoin can be taken seriously without a central authority, so much the better.  We should not be shoe-horning Bitcoin into the model of centrally issued tokens to gain approval; we should be celebrating Bitcoin's potential to provide a viable alternative to centrally issued tokens as a means of exchange.

[guybrushthreepwood]

What's 'backing'? Isn't it this stuff:

[deisik]

Bitcoin is not issued therefore it is not backed.  Bitcoin's lack of central authority is a strength, not a weakness.

For an established currency, a backing is a liability.  The backing tells us that some part of the value or stability of the currency is dependent on the promise of some entity.  What would happen if that entity were to break the promise? (see: Nixon Shock)

Backing is what gives Bitcoin value. State issued fiat currency is backed by taxes which make possession of tokens of this currency a must, and by the goods you can exchange it for. Ultimately, this can be reduced to utility a currency provides to its holder. If it ceases to provide any, it loses its value through losing usefulness, as is the case with any example of hyperinflation in history...

[Ibian]

Fiat currency is backed by the threat that if you don't have some to give to the government when they want it, you go to jail.

The US dollar is a promise that you can redeem it - for dollars.

Exactly, a dollar is a bearer bond that can extinguish a Dollar of DEBT, debt in the form of taxation is a big part of that, but also legal tender laws mean ANY private debt can also be extinguished by the dollar.  So the dollar is the universal extinguisher of all debts in the U.S. and that is it's backing.

I've argue in other threads that the BTC computer network or even the cryptographic code of BTC dose not constitute backing for BTC, because it dose not establish any price or valuation for BTCs.  Instead all they do is try to provide limited security against theft, and prevent counterfeiting.  So while users can have some assurance they will still posses their BTCs in the future and that BTC will still be rare, theirs no guarantee they will be high priced in the future.

Also in response to an earlier statement that 'all goods exchanged or offered for sale for BTC' are a backing, this wrong for two reasons.  First all such merchants are free to remove these offers at any time, and second not one single merchant on Earth actually sets prices IN BTC itself, they always make use of the exchange rate and thus they do not act to fix a value for BTC because you can have no confidence that any quantity of coins will ever buy any amount of merchandise.

Welcome to a new paradigm. All your economical fiat theory is useless with and does not apply to something like bitcoin. You are dinosaur.

[deisik]

The term "backing" is completely meaningless in the context of Bitcoin. Backing means that a FIAT currency CAN BE REDEEMED for some commodity, since that fiat currency is nothing more than a promise not to inflate too much.

Bitcoin is not fiat, it can't be inflated, and it doesn't rely on promises, so it is meaningless to ask what it is "backed" by.

Backing is about people pathetically pleading to their government to please not destroy the value of the pieces of paper they are forced to use as legal tender, to please ostensibly allow people to trade it for gold or some other store of value in order to build more TRUST. It has absolutely nothing to do with Bitcoin, and that's GOOD.

By backing people usually mean something that gives money real value (beyond just face-value), thus making it useful for them to hold it. If you agree to this definition, then backing is not meaningless even in the context of Bitcoin. And yes, you redeem a token of fiat currency when you exchange it for goods, so it is backed up by the commodities that are denominated in that currency...

[deisik]

Fiat currency is backed by the threat that if you don't have some to give to the government when they want it, you go to jail.

The US dollar is a promise that you can redeem it - for dollars.

Exactly, a dollar is a bearer bond that can extinguish a Dollar of DEBT, debt in the form of taxation is a big part of that, but also legal tender laws mean ANY private debt can also be extinguished by the dollar.  So the dollar is the universal extinguisher of all debts in the U.S. and that is it's backing.

I've argue in other threads that the BTC computer network or even the cryptographic code of BTC dose not constitute backing for BTC, because it dose not establish any price or valuation for BTCs.  Instead all they do is try to provide limited security against theft, and prevent counterfeiting.  So while users can have some assurance they will still posses their BTCs in the future and that BTC will still be rare, theirs no guarantee they will be high priced in the future.

Also in response to an earlier statement that 'all goods exchanged or offered for sale for BTC' are a backing, this wrong for two reasons.  First all such merchants are free to remove these offers at any time, and second not one single merchant on Earth actually sets prices IN BTC itself, they always make use of the exchange rate and thus they do not act to fix a value for BTC because you can have no confidence that any quantity of coins will ever buy any amount of merchandise.

Welcome to a new paradigm. All your economical fiat theory is useless with and does not apply to something like bitcoin. You are dinosaur.

No, he is not a dinosaur. He just happens to not properly understand what that "economical fiat theory" is about. Neither is it a new paradigm really (at least in this aspect)...

[Ibian]

Fiat currency is backed by the threat that if you don't have some to give to the government when they want it, you go to jail.

The US dollar is a promise that you can redeem it - for dollars.

Exactly, a dollar is a bearer bond that can extinguish a Dollar of DEBT, debt in the form of taxation is a big part of that, but also legal tender laws mean ANY private debt can also be extinguished by the dollar.  So the dollar is the universal extinguisher of all debts in the U.S. and that is it's backing.

I've argue in other threads that the BTC computer network or even the cryptographic code of BTC dose not constitute backing for BTC, because it dose not establish any price or valuation for BTCs.  Instead all they do is try to provide limited security against theft, and prevent counterfeiting.  So while users can have some assurance they will still posses their BTCs in the future and that BTC will still be rare, theirs no guarantee they will be high priced in the future.

Also in response to an earlier statement that 'all goods exchanged or offered for sale for BTC' are a backing, this wrong for two reasons.  First all such merchants are free to remove these offers at any time, and second not one single merchant on Earth actually sets prices IN BTC itself, they always make use of the exchange rate and thus they do not act to fix a value for BTC because you can have no confidence that any quantity of coins will ever buy any amount of merchandise.

Welcome to a new paradigm. All your economical fiat theory is useless with and does not apply to something like bitcoin. You are dinosaur.

No, he is not a dinosaur. He just happens to no properly understand well enough what "economical fiat theory" is about. Neither it is a new paradigm really...

I'm not convinced he doesn't understand any specific thing. Everything in this thread has been gone over with him before. He keeps saying the same things.

[andrewboy44]

Started a thread similar to this a few weeks ago. Users posted some good info. https://bitcointalk.org/index.php?topic=350536.msg3754199#msg3754199

[CMMPro]

Fiat currency is backed by the threat that if you don't have some to give to the government when they want it, you go to jail.

The US dollar is a promise that you can redeem it - for dollars.

Exactly, a dollar is a bearer bond that can extinguish a Dollar of DEBT, debt in the form of taxation is a big part of that, but also legal tender laws mean ANY private debt can also be extinguished by the dollar.  So the dollar is the universal extinguisher of all debts in the U.S. and that is it's backing.

I've argue in other threads that the BTC computer network or even the cryptographic code of BTC dose not constitute backing for BTC, because it dose not establish any price or valuation for BTCs.  Instead all they do is try to provide limited security against theft, and prevent counterfeiting.  So while users can have some assurance they will still posses their BTCs in the future and that BTC will still be rare, theirs no guarantee they will be high priced in the future.

Also in response to an earlier statement that 'all goods exchanged or offered for sale for BTC' are a backing, this wrong for two reasons.  First all such merchants are free to remove these offers at any time, and second not one single merchant on Earth actually sets prices IN BTC itself, they always make use of the exchange rate and thus they do not act to fix a value for BTC because you can have no confidence that any quantity of coins will ever buy any amount of merchandise.

Welcome to a new paradigm. All your economical fiat theory is useless with and does not apply to something like bitcoin. You are dinosaur.

No, he is not a dinosaur. He just happens to no properly understand well enough what "economical fiat theory" is about. Neither it is a new paradigm really...

I'm not convinced he doesn't understand any specific thing. Everything in this thread has been gone over with him before. He keeps saying the same things.

Bitcoin is not a debt based currency so most of his arguments are comparing apples (fiat/debt based) to oranges (XBT/possession based). In XBT there is no debt to be exchanged or extinguished...one would argue one of the most important features of bitcoin itself. 

[johnyj]

Bitcoin is not a debt based currency so most of his arguments are comparing apples (fiat/debt based) to oranges (XBT/possession based). In XBT there is no debt to be exchanged or extinguished...one would argue one of the most important features of bitcoin itself. 

Exactly, just like gold, for every mined bitcoin, the cost is already paid, it is debt free, thus do not need anything to back it. It has a base  value, which is the cost, and its future value depend on its usefulness

On the other hand, if bitcoin do not have any demand, even it cost millions to make a coin, its future value is limited

Another point of view: Millions of distributed central bankers want to compete with existing central bankers, and their biggest advantage is limited money supply, while the existing central bankers' biggest advantage is price stability

[godislove]

There are 3 elements to the correct answer to "What is bitcoin's backing?" (aka "value"):

1) It's new.  Cryptocurrencies are new and important because a) they are fast, all digital, and cheap to transfer and b) because the world can't trust most of the governments who are printing money to make sure their currency keeps a constant value as defined by a basket of commodities.

2) By convention. By convention people have decided bitcoin is going to be the first and biggest, since the alternatives do not provide anything substantially better.  They are not going to give similar options the same value because then all coins will lose value.  That is why MtGox, Bitstamp, and BTCChina have not yet fully supported litecoin and others.  It all falls apart if the leaders recommend all good alt coins.  "bitcoin" is the flag under which the future is being created.  It needs to get established by convention.  I expect litecoin announcements from at least MtGox and BTCChina this month or next.

3) Its miners are a threat to alt coins. Smaller alt coins with a similar proof-of-work scheme are not going to be as secure if the profits from their mining and transaction fees wear thin relative to their value.  Proof-of-work alt coins can come under attack from excess or outdated bitcoin and litecoin mining equipment. So alt coins can't have a value per mining/node expense that exceeds bitcoin's value per mining/node expense.  I mean to say the payout to the smaller coin's miners has to be larger than bitcoin's which devalues the coin relative to bitcoin.  This known as the monopoly advantage where the biggest is not necessarily the best.  This has happened because there is no government to keep the monopoly power in check and allow the free market mechanism to work (assuming you think monopolies being regulated is part of the definition of a free market).  

"Free market" meant to classical economists the using of the power of democratic government to keep the economy free from monopolists, landlords, and others who used wealth to extract more wealth without increasing society's useful productive power.  Milton Friedman, in the most ingenious and powerful use of rhetoric the world has ever known, bastardized the term "free  market" to mean "free from government oppression" which was thoroughly adopted by banks, Republicans, Ayn Rand lovers, new-age Austrians (nutty with religious fervor), and Libertarians. At least libertarians are honest about wanting all poor and stupid people to be wiped off the face of the Earth.  Who can argue against that goal?  Well, um, all the poor and stupid people who make up half of all democracies, that's who.

[deisik]

This thread is a great example of people inventing a new meaning of "backing" on the spot. Obviously, a discussion of what backs bitcoin, or a fiat currency, or gold, or beer is worthless if nobody even agrees on what "backing" or 'backed by" means.

I stick to very simple and cogent definition of what backing is or what being backed by actually means, i.e. an inherent property or quality that makes something useful in reaching an individual's aims and ends or preventing the occurrence of some adverse consequences... Your take?

[johnyj]

People are searching for "Backing" because they are afraid of a crisis when everyone are selling their coin (in such a case if no one is backing bitcoin its value could drop to zero)

Fiat money does not need such "Backing" since you normally can not sell your fiat money (Forex is a place that you can sell one fiat for another, so typically you have central banks intervention in Forex market) , most of the time it is the only medium of exchange and accepted everywhere domestically. If you remove all the fiat money, the economy activities will come to a halt

If bitcoins are accepted everywhere, then it will be backed by merchants who accept bitcoin payment