What's the best answer to this question ? "What is its backing? "

[eldentyrell]

Same thing backing gold: scarcity.

In this case it's scarcity of computing power instead of scarcity of 79-proton nuclei.

[molecular]

Bitcoin Backs a free decentralized economy

It's nice to see people joining the community are here for the right reasons.

Same time last year a wholly different type of crowd was being attracted to bitcoin.

[molecular]

Same thing backing gold: scarcity.

In this case it's scarcity of computing power instead of scarcity of 79-proton nuclei.

The usual debunking of this goes like: "My shit is pretty scarce, yet worthless."

[edd]

I mean, that's really all there is to it.  It's backed by a sufficient number of people believing that it has value.

I would add, "...just like conventional currencies."

[MoonShadow]

Same thing backing gold: scarcity.

Scarcity is  not a requirement.  Mined & refined silver is more rare in our modern industrial world than mined & refined gold, yet gold still has a higher monetary value.  The same is true for a great many other things, such as 'rare earth' minerals.  Rare earths are not rare, they are just hard to find in a high enough of a concentration to be economically viable otherwise.

[nybble41]

"Backing" is a concept which applies to currency substitutes. When a bank issues a note, the backing is whatever the issuer promises to exchange for the note on demand. Back when the U.S. was on a gold standard, for example, the Treasury committed to exchanging each Treasury note for a specific amount of gold (albeit increasingly below the market value, and eventually only in large quantities). These days Federal Reserve Notes are no longer currency substitutes, and no offer is made by the Treasury or the Federal Reserve to exchange them for anything. Ergo, like Bitcoins, they have no backing, and stand (or fall) on their own merits as an independent currency.

[eldentyrell]

Same thing backing gold: scarcity.

In this case it's scarcity of computing power instead of scarcity of 79-proton nuclei.

The usual debunking of this goes like: "My shit is pretty scarce, yet worthless."

I never said all scarce things make good currencies.

You can't send your shit half-way around the world for a fraction of a cent.  If you could (magically) do this, and it was easy for computers to distinguish your shit from countershit fit, then I would consider using it as a currency.  No joke.

If lots of women thought your shit made good jewelry, we might use your shit as currency too.

[eldentyrell]

Same thing backing gold: scarcity.

Scarcity is  not a requirement.

I disagree.  If there is an unlimited supply of something available for no effort, it is not going to be used as currency.

[MoonShadow]

Same thing backing gold: scarcity.

Scarcity is  not a requirement.

I disagree.  If there is an unlimited supply of something available for free, it is not going to make a good currency.

Disagree all you want, but scarcity isn't a requirement, only a limited supply.  They are not the same thing.  I should say that scarcity is important in the sense that it affects the value of things, but only as the other side of the equation to demand; however scarcity alone doesn't create that demand.  And if something is too scarce for the common person to have any practical experience with it, such as platinum before 1850, then it ends up being regarded as worthless metal and made into cannons for ships built to carry gold.

[eldentyrell]

Same thing backing gold: scarcity.

Scarcity is  not a requirement.

I disagree.  If there is an unlimited supply of something available for free, it is not going to make a good currency.

scarcity isn't a requirement, only a limited supply.  They are not the same thing.

Close enough for me.

s/scarcity/limited supply/

[caveden]

Scarcity is  not a requirement. 

Scarcity is definitely a requirement for something to have value, thus, it's a requirement for something to be a currency. It is not enough, but it is a requirement.

[molecular]

Scarcity is  not a requirement. 

Scarcity is definitely a requirement for something to have value, thus, it's a requirement for something to be a currency. It is not enough, but it is a requirement.

yes, scarcity is not sufficient. You also need fungibility, countability, divisibility, transferrability.

Bitcoin is a commodity money and I still hold the opinion that the term "backed by" does not apply here at all. Bank notes might be backed by something.

I understand "backed by x" as "the note is redeemable for x at the issuer".

When people say things like "bitcoin is backed by the people", I head: "bitcoins value is supported by the people".

[johnyj]

All value is backed by human demand, and since it has so many special characteristics, especially limited supply, there will be demand

[Fjordbit]

I feel this question is a little leading because there is nothing "backing" bitcoin. But this isn't the right question to ask. The right question is "Why does bitcoin have value."

Just to set aside the "backing" concept, the electricity of the miners does not back the currency. It validates the blockchain but it does not back bitcoin in any way. Miner's electicity bills are a response to the price, not the other way around, and as the price crashed last year, miners turned off their rigs. Similarly, gold is not backed by the effort of gold miners. It is when the price of gold rises that miners can spend effort panning for a few ounces of flakes in 30 tons of dirt.

So where does the value come from? This is a little bit difficult to conceptualize, especially because it is the result of an equilibrium of a set of differential equations, but the simple answer is that the value of the coins comes from minor differences in the value from when a buyer buys coins, sends them to the seller, and the seller sells them (called the spread). On average, this transaction ends up with the seller making a slightly less amount than the buyer. This amount aggregated over all the transactions in a blockchain is then divided into the reward amount and this is the fundamental value of a bitcoin. However, this is done 1440 times a day and not all mined coins are spent, etc, etc, and also there is an individual preference in each transaction that determine the tolerated spread amount. So it becomes a lot more complex.

But let's just keep it simple.

Let's say the entire bitcoin world consisted of a buyer addicted to ice cream, a seller, and a miner. The seller sells ice cream for $50 that they make with $30 in inputs. Let's run a few transactions.
Every week, the buyer buys $50 in bitcoin and sends it to the seller. The seller puts all the bitcoin they get up for sale, and the next week the buyer buys $50 worth again. Every week there is one transaction which the miner mines for 50 btc. Now what is a fair value for bitcoin?

In this scenario, if bitcoin were $1/btc, then that would mean for each transaction the miner would be getting $50. They could take that 50 btc and buy some ice cream from the seller. The seller would now have 100 btc and would put it up for sale. But the buyer only wants $50 in ice cream, so the seller never makes back that money and they've spent $60 in inputs so they can't continue their business with just $50. The whole equation is out of whack.

I'll just skip forward to a possible answer. It might be that bitcoins are worth about .0196/btc. The buyer buys the $50 in btc and sends it to the seller. The seller then puts their 2500 up for sale. The miner has also mined the transaction and puts their 50 coins up for sale. The buyer buys all 2550 of the coins for $50, of which the seller gets $49.02 and the miner gets $.98. Now, because this is inflationary, in the next round the buys sends 2550, but 2600 end up in the market. However, the price is about stable.

So where does the spread from the buyer paying $50 and the seller getting $49.02 come from? Again, that is a personal preference based on the people who are making the transaction. You can say though, that most sellers would be tolerant of a 3% spread because this is as good as Visa processing, and there is no chance of chargebacks. In addition, buyers might be willing to pay for this if there is an item they feel they can only get through bitcoin (e.g. the ice cream is $49.02 in stores, but the buyer can't get to those stores).

This means that there are two main factors when it comes to bitcoin price: how much is being transacted per average block (the velocity of bitcoin), and how much of a spread is acceptable to an average transaction.

[Gavin Andresen]

I usually answer with:

Why do screwdrivers have value? What backs the value of a screwdriver?
Because they're useful and it takes effort to create them.

Bitcoin has value for the same reasons.

[molecular]

I feel this question is a little leading because there is nothing "backing" bitcoin. But this isn't the right question to ask. The right question is "Why does bitcoin have value."

Just to set aside the "backing" concept, the electricity of the miners does not back the currency. It validates the blockchain but it does not back bitcoin in any way. Miner's electicity bills are a response to the price, not the other way around, and as the price crashed last year, miners turned off their rigs. Similarly, gold is not backed by the effort of gold miners. It is when the price of gold rises that miners can spend effort panning for a few ounces of flakes in 30 tons of dirt.

So where does the value come from? This is a little bit difficult to conceptualize, especially because it is the result of an equilibrium of a set of differential equations, but the simple answer is that the value of the coins comes from minor differences in the value from when a buyer buys coins, sends them to the seller, and the seller sells them (called the spread). On average, this transaction ends up with the seller making a slightly less amount than the buyer. This amount aggregated over all the transactions in a blockchain is then divided into the reward amount and this is the fundamental value of a bitcoin. However, this is done 1440 times a day and not all mined coins are spent, etc, etc, and also there is an individual preference in each transaction that determine the tolerated spread amount. So it becomes a lot more complex.

But let's just keep it simple.

Let's say the entire bitcoin world consisted of a buyer addicted to ice cream, a seller, and a miner. The seller sells ice cream for $50 that they make with $30 in inputs. Let's run a few transactions.
Every week, the buyer buys $50 in bitcoin and sends it to the seller. The seller puts all the bitcoin they get up for sale, and the next week the buyer buys $50 worth again. Every week there is one transaction which the miner mines for 50 btc. Now what is a fair value for bitcoin?

In this scenario, if bitcoin were $1/btc, then that would mean for each transaction the miner would be getting $50. They could take that 50 btc and buy some ice cream from the seller. The seller would now have 100 btc and would put it up for sale. But the buyer only wants $50 in ice cream, so the seller never makes back that money and they've spent $60 in inputs so they can't continue their business with just $50. The whole equation is out of whack.

I'll just skip forward to a possible answer. It might be that bitcoins are worth about .0196/btc. The buyer buys the $50 in btc and sends it to the seller. The seller then puts their 2500 up for sale. The miner has also mined the transaction and puts their 50 coins up for sale. The buyer buys all 2550 of the coins for $50, of which the seller gets $49.02 and the miner gets $.98. Now, because this is inflationary, in the next round the buys sends 2550, but 2600 end up in the market. However, the price is about stable.

So where does the spread from the buyer paying $50 and the seller getting $49.02 come from? Again, that is a personal preference based on the people who are making the transaction. You can say though, that most sellers would be tolerant of a 3% spread because this is as good as Visa processing, and there is no chance of chargebacks. In addition, buyers might be willing to pay for this if there is an item they feel they can only get through bitcoin (e.g. the ice cream is $49.02 in stores, but the buyer can't get to those stores).

This means that there are two main factors when it comes to bitcoin price: how much is being transacted per average block (the velocity of bitcoin), and how much of a spread is acceptable to an average transaction.

firstly: +1 on wrong question being asked.

secondly: interesting thoughts! So if I supply 2 values (velocity of bitcoin: 190000 BTC/day and acceptable spread: 1%), you can calculate a bitcoin price from that? It seems to me there are some more values that'd need to be supplied, no?

[Fjordbit]

firstly: +1 on wrong question being asked.

secondly: interesting thoughts! So if I supply 2 values (velocity of bitcoin: 190000 BTC/day and acceptable spread: 1%), you can calculate a bitcoin price from that? It seems to me there are some more values that'd need to be supplied, no?

It is a lot more complicated. I simplified it along those two lines just to give an important illustration of where the actual value comes from. Another factor is savings rate, because if the miner or the seller is not selling their coins, it has short term effects. In addition, this is just how the market moves to resolve itself to a price that doesn't topple the system. So you might be able to estimate an average price over a few months, but it wouldn't help you to know what the price should be right now.

There's really a lot of things in play, but it can be easily demonstrated where the money is coming from, which I think is what concerns most people. The money comes from the people depositing at exchanges, and because miners are getting a part of the economy, it means that that amount is being split between the miners and whoever is intended to withdraw the money.

[FreeMoney]

It is backed by currencies weaker than bitcoin.

The old joke with the punchline "I don't have to outrun the bear, I just have to outrun you" applies. I'm a huge bitcoin supporter, but if major countries decided to return to a gold standard, I would be selling my coins. But while the world plays pretend with fiat, bitcoin is superior. 

Really?

Some governments promise to redeem their paper for gold then break that promise. Now if they promise it again you'll go for it?

Why would you drop coins for paper backed by even a credible promise of gold, but you don't drop coins for actual gold which you could get now? I suppose the paper gold would fly through the tubes better than actual gold, is that it or something else also?

[FreeMoney]

I usually answer with:

Why do screwdrivers have value? What backs the value of a screwdriver?
Because they're useful and it takes effort to create them.

Bitcoin has value for the same reasons.

What do you say when they ask to see your huge stash of screwdrivers?! :-)

[MoonShadow]

I usually answer with:

Why do screwdrivers have value? What backs the value of a screwdriver?
Because they're useful and it takes effort to create them.

Bitcoin has value for the same reasons.

What do you say when they ask to see your huge stash of screwdrivers?! :-)

Show them the hardware isle.