Backing Bitcoin with People

[Meni Rosenfeld]

bitcoins are backed by the proof of work and elecricity used to mint the coin

I think Bitcoin is already backed by hardware power and miner's know-how.

Bitcoin is backed by MATH. 

This is a myth I wish would have been rooted already.

"X is backed by Y" means there is a guarantee that you can hand over X and receive a specified amount of Y. In the "electricity / hardware power" this is reversed - a mining rig can transform electricity to bitcoins, not the other way around. If someone finds a machine that can convert bitcoins to electricity, let me know. Also, the conversion ratio isn't fixed.

"Math / proof of work" only guarantee that a bitcoin is a bitcoin, it doesn't guarantee that it has any sort of value. To be of value, Bitcoin needs both the math to protect it from loss, theft, inflation, counterfeit and double-spending, and the people offering goods, services and other currencies for it and believing in its long-term prospects. If you take just the first without the second you get something worthless (see also testnet bitcoins).


Now for the OP... Even if you could somehow make it scale, attempts to put a floor on the exchange rate can backfire due to anchoring effects. Suppose "The Bitcoin Floor Company" enters into a legally binding agreement to always offer $0.01 per bitcoin. This only requires a $210K reserve and presumably is a net positive - people will be guaranteed that no matter what happens, a bitcoin will always be worth at least $0.01. But when people will try to form an opinion on what a bitcoin really is worth, they'll think (whether consciously or subconsciously) "Well, this company backs bitcoins by $0.01, so I guess they're worth just a little bit above that". This can cause a decrease in its valuation.

[DeathAndTaxes]

The question I'm trying to answer, which I hear often from people I talk about bitcoin with, is what is the value of a bitcoin? or what happens if bitcoins are no longer worth money?

Your premise doesn't solve that problem either.

Say a person provides a service they normally charge $100 for.  They decide to allow 5 services per month for 20 BTC instead.  If BTC were worthless do you think they would still keep offering the service for worthless coins into perpetuity.   Likewise if the price of Bitcoin rises to $10,000 ea are they still going to "offer" the service for "only" 20 BTC ($200K)?  If it falls to $0.01 are they going to offer it for $0.20?

Obviously they will adjust their prices and even stop offering it in Bitcoin based on the value of Bitcoin.  Right?  Thus you haven't provided any value for Bitcoin beyond its already agree upon value.

However more simply more people offering goods & services in Bitcoins increases the demand for Bitcoins and that rise in demand raises the price.  Bitcoin is no different than any other currency in that it's value is based on demand.  If demand for Bitcoin is greater than supply price will rise.  Since supply if fixed (thankfully) is you want Bitcoin to be "backed" by something simply encourage more people to accept and pay with Bitcoins.

[istar]

"Well, this company backs bitcoins by $0.01, so I guess they're worth just a little bit above that". This can cause a decrease in its valuation.

Good point.

[jjshabadoo]

Yes I would be willing to offer the service regardless of bitcoin value. That was what I was getting at with the "donation" aspect of my original post. It's a "pledge" by bitcoin advocates to offer some small service or good, no matter what bitcoin's are worth in terms of fiat, over a set period of time.

Now of course it's not entirely forceable by law, but if people follow through over time, the feedback system will show that certain people are truly legit.

I know this is still an imperfect system which is not rock solid, but it shows that people are willing to back bitcoin with more than money or computer hardware. They are willing to do it with their time or products.

Just another layer to add.

I think this website could have an area for people who are simply willing to accept bitcoin and those folks can change their rates whenever they want. Then we could have a "donor" side with fixed pricing which does not reflect fiat value.

A way to support aspiring bitcoin entrepreneurs and also show people the bitcoin community cares about aspects of bitcoin beyond pure monetary value.

[Meni Rosenfeld]

I think you folks discussing exchanging Bitcoin for fiat and setting a price floor are missing the point of the post. Maybe I'm wrong or maybe it's impossible to separate an exchange rate from another method of valuation.

The extent to which they can be separated is very small for the purpose of evaluating the OP's core idea. Fiat currency is very liquid and has more or less steady purchasing power, so it just simplifies the discussion to talk about exchange rates and I don't think it takes away anything meaningful.

[bc]

The OP reminds me of Allthis:

http://mashable.com/2011/10/18/allthis/

[Trader Steve]

Bitcoin is backed by whatever someone will trade you for it - no more and no less. Why do I accept it? Because there are others who will trade me their goods and services for it (although I'm somewhat limited in my choices). People value it because of its unique features and benefits as a medium of exchange. Like any commodity, its value is reflected in its exchange price (market price). Any attempt to "fix" a price to bitcoin is destined to fail because price-fixing does not work.

[DeathAndTaxes]

Then when someone says, "Bitcoin is the plaything of speculators, drug-dealers, and hackers", you could say, "I just paid my washing machine repair man with Bitcoin!"

That just requires someone accepting Bitcoins (which is a decent goal).

Far easier to convince your repair man to accept Bitcoins at FACE VALUE then to convince him he should do a repair for 20 BTC even if that means making less than minimum wage.

Adoption increases utility but that had nothing to do with the OP.

[jjshabadoo]

No Holliday, you read me absolutely correct. Bitcoin supporters might choose to "discount" or "fix" their services/goods. Others should clearly charge what they think is worthwhile based on whatever value they choose, exchange rates, etc.

My idea was to simultaneously promote bitcoin business and also create some kind of "soft" backing in terms of supporters simply taking the exchange rate out of it. I thought the supporter aspect just might demonstrate the ongoing commitment and show laypeople that there is a solid group who are behind this, that is all. So behind it that they are willing to accept bitcoin for the sake of bitcoin, regardless of exchange rates.

You are correct, it seems "backing" was a poor choice of words.

I was also thinking maybe the site could charge a transaction fee, but use those funds to support the open source work in the community. Make monthly donations to the people working on the miners and other bitcoin specific programs, since they are really the lifeblood of bitcoin's advancement.

[jjshabadoo]

@bc  allthis is certainly similar to what I am proposing, but without the speculative aspect. I wouldn't want people to be buying someone's service at a cheap BTC rate and then reselling.

Now maybe an auction aspect could be cool especially those raising funds to promote bitcoin or to help out an open source developer. Once purchased I don't think the service should be resold.

The auction would be cool though. Let's say I'm willing to donate a mining card in order to raise money for ckolivas, since I use cgminer and love it. I post the mining card with a starting value and then allow people to bid in bitcoin. Maybe 10% goes to the site for funding and the rest gets donated to ckolivas for his great miner.

Lots of cool things could be explored.