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

[molecular]

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?

Probably the "something else" is the not-so-low probability of no major country deciding to return to a gold-backed fiat currency.

I agree with Detlev Schlichter who argues for a market-based monetary system: http://whiskeyandgunpowder.com/the-death-of-banks-and-the-future-of-money/

Trying to ‘reform’ the present system is a waste of time and energy. It is particularly unbecoming for libertarians as they run the risk of getting infected with the strains of statism that run through the system. Let’s replace this system with something better. With a market-based monetary system.

I word it a little differently: Scrap the paper, we need free market money.. Just sounds better, doesn't it?

Thats the way it's going to (hopefully) go, guys. And we all better keep at least some of our coins, because bitcoin is a serious player in the market for free market money.

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[molecular]

After having contemplated this thread with considerable joy, I must agree with Fjordbit that "What is its backing" is not the right question to ask.

So an appropriate answer might be:

Who cares? Look, I can buy coke and hookers with it! *buy coke and hooker for person asking the question*. More questions?

[radracer]

this thread has gone in the right direction.  if someone asks what is "backing" a currency, they simply don't understand money.

[Boussac]

As this question is normally asked by goldbugs, my answer normally is: "Bitcoin is backed by the same thing that backs gold, that is, nothing."

No "base currency" is backed by anything btw. People that say: "I don't accept a money backed by nothing" don't really know what they're talking about. Base money is by definition not backed by anything.

The argument offered by the advocates of central elastic money goes like this:
1/ central money is the only legal tender to extinguish a fiscal debt
2/ the State has unlimited taxing power over the entire economy ( the implication being that the State has the power to nationalize the entire economy)
3/ therefore, central money is backed by the entire economy.

This is a HUGE fallacy because,unless you live in North Korea, assumption 2 is simply wrong..
Therefore, central money is backed by the limited taxing power of the State enabling lawful confiscation of a fraction of the economy: that leaves a very large chunk of the economy available for another medium of exchange..

To sum things up: let the State enforce elastic money to collect taxes and to provide useful public services and let the people use commodity money like bitcoin to create optimal economic conditions.

[caveden]

The argument offered by the advocates of central elastic money goes like this:
1/ central money is the only legal tender to extinguish a fiscal debt
2/ the State has unlimited taxing power over the entire economy ( the implication being that the State has the power to nationalize the entire economy)
3/ therefore, central money is backed by the entire economy.

Even if we were to take items (1) and (2) for granted, you still cannot conclude (3).
When you say "this bill X is backed by Y", you're stating that there is someone (normally the issuer of X) who is contractually obliged to redeem your X bill for Y at reception. He must give you Y if you give him X, otherwise it would be a fraud. So it doesn't make sense saying that something is backed by "the entire economy", as such contract wouldn't even be possible.

A "money backed by something" is not "base money", it is just a "money substitute".  By definition, base money cannot be backed by anything. And bitcoin, as gold and government money for that matter, are all base money (= the component(s) of the monetary base, or M0).

[hazek]

The best answer to the thread title question is to compare bitcoins with gold.

Nothing backs gold, gold itself is what has value. Why does it have value? What is gold? Gold is a clump of rock. Why don't people value other clumps of rock? Because the clump of rock known as gold has special properties. So people don't really value gold, people value the properties that gold has. If dirt had the same properties as gold, dirt would be likely equally valued.

And this is how bitcoins compare to gold. They too aren't just any digital currency, they are a digital currency with special properties that people equally value. If anyone is going to make an argument that gold is actually backed by it's properties the same exact argument can be made for bitcoins, namely that they are backed by their properties. And as long as bitcoins can maintain their properties they'll remain valued.

It's that simple.

Please watch the 5min long video presentation at this link to learn more about why gold became money: http://www.zerohedge.com/news/why-did-gold-become-money

[2112]

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.

I had a good luck with the following summary:

Bitcoin is backed by the lack of faith in government. People who value bitcoin have more faith in a "distributed zero-trust cryptographic-currency" implicitly give negative credit to their local governmental and banking institutions.

[Boussac]

Sorry for necroposting but I realize the best answer is not in the thread yet. How about this one.

Just like gold, bitcoin is backed by scarcity and usage value.
Gold is scarce and valuable for making jewelry.
Bitcoin is scarce and valuable for processing internet payments.

Any other question ?

[hazek]

Sorry for necroposting but I realize the best answer is not in the thread yet.

Didn't I basically say the same thing?

[cbeast]

Because I said so.

[Boussac]

Sorry for necroposting but I realize the best answer is not in the thread yet.

Didn't I basically say the same thing?

IMHO talking about properties as in your post isn't clear.

Something may have very special properties and yet be worthless because the properties are not valuable in any usage.

Also you are not mentioning transaction processing while I believe this is where there is a huge value proposition for using  the bitcoin network. That's what gives "backing" to the price of bitcoins.

[molecular]

Because I said so.

Because I said so, too.

[westkybitcoins]

As this question is normally asked by goldbugs, my answer normally is: "Bitcoin is backed by the same thing that backs gold, that is, nothing."

This is most accurate.

Although I'd probably go with "It's backed by human demand for a suitable money, just like gold."

[FreeMoney]

Although I'd probably go with "It's backed by human demand for a suitable money, just like gold."

But that's not what backing is. Backing is a promise to give something worth more for something worth less. Backing is for worthless things like paper. Not bitcoin or gold.

[molecular]

Although I'd probably go with "It's backed by human demand for a suitable money, just like gold."

But that's not what backing is. Backing is a promise to give something worth more for something worth less. Backing is for worthless things like paper. Not bitcoin or gold.

You nailed it, thanks.

[sunnankar]

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

Anytime you want baby!

[westkybitcoins]

Although I'd probably go with "It's backed by human demand for a suitable money, just like gold."

But that's not what backing is. Backing is a promise to give something worth more for something worth less. Backing is for worthless things like paper. Not bitcoin or gold.

True, your statement of what backing is is accurate. But asking the question implies certain presumptions that are untrue, and I'd want to address that. A simple reply of "Nothing," with no follow up won't really progress the conversation.

[myrkul]

Although I'd probably go with "It's backed by human demand for a suitable money, just like gold."

But that's not what backing is. Backing is a promise to give something worth more for something worth less. Backing is for worthless things like paper. Not bitcoin or gold.

True, your statement of what backing is is accurate. But asking the question implies certain presumptions that are untrue, and I'd want to address that. A simple reply of "Nothing," with no follow up won't really progress the conversation.

True, but, "Nothing. Backing is a promise to give something worth more for something worth less. Backing is for worthless things like paper. Not bitcoin or gold," would.

[the joint]

It's backed by the system of people using computers.

1)  Without people, nobody hits the "go" button on their miners or opens their client software, and nobody makes transactions.

2)  Without computers, transactions are not confirmed and thus there is no confirmed value.

You need both.  Computers without people operating them are useless, and people without computers cannot use Bitcoin.

[westkybitcoins]

Although I'd probably go with "It's backed by human demand for a suitable money, just like gold."

But that's not what backing is. Backing is a promise to give something worth more for something worth less. Backing is for worthless things like paper. Not bitcoin or gold.

True, your statement of what backing is is accurate. But asking the question implies certain presumptions that are untrue, and I'd want to address that. A simple reply of "Nothing," with no follow up won't really progress the conversation.

True, but, "Nothing. Backing is a promise to give something worth more for something worth less. Backing is for worthless things like paper. Not bitcoin or gold," would.

Meh. Too wordy, plus it doesn't get to the heart of WHY paper, bitcoin, gold, etc. are different. It's just antagonistic toward paper without showing what makes gold (and bitcoin) valuable.

My take on it, anyway.