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Author Topic: Why don't we just create backing for Bitcoin?  (Read 4242 times)
fimp
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June 20, 2012, 07:32:17 PM
 #1

Personally I don't think Bitcoin absolutely needs to be backed up by anything else. It's a great medium of exchange as it is. But some people see the missing backing as a huge disadvantage that could result in a downward speculation spiral that would make bitcoins worthless.

As long as bitcoin can do stuff that no other medium of exchange can do, I don't see this downward spiral to 0 happening. But to ease the minds of skeptics, why don't we create our own backing for Bitcoin?

Set up an organization that accepts donations from community members. All donations will be put in gold (alternatively a basket of commodities/government currencies), and the organization will announce that it will forever pay out exactly x gold grams for 1 Bitcoin.

So, for instance, if the organization holds 10kg of gold, it would promise to always pay exactly 10 000 / 21 000 000 = 0.000476 gg/BTC


Now the market exchange rate may rise way above x gg/BTC, but if people trust this organization the exchange rate will never go below.

The hard problem seems to be to find the people to put in charge of the organization. But it seems very likely that we can find people more trustworthy than the people in charge of government monetary policy.

I think this could help Bitcoin gain trust.

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June 20, 2012, 08:07:42 PM
 #2

It is a nice idea, but bitcoin exchange rates fluctuate so much that you could lose out massively by backing up investments with gold. The way bitcoins are rising, i don't see the rates dropping at all in the future, i can only see them go up and up, so what would be the real plus point to doing this?
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June 20, 2012, 08:12:52 PM
 #3

It is a nice idea, but bitcoin exchange rates fluctuate so much that you could lose out massively by backing up investments with gold. The way bitcoins are rising, i don't see the rates dropping at all in the future, i can only see them go up and up, so what would be the real plus point to doing this?
1. This would be an organization with no intent to profit. All funds would be donated so noone in the organization would be able to lose anything. All it would do would be to promise to pay out x gg for 1 BTC. Also, if the market trusts this organization, the fact that it exists would mean that the exchange rate would never go below x gg/BTC. Of course the funds of the organization should be large enough to ultimately allow every BTC to be bought this way.

2. This is not primarily meant for those who already think that the Bitcoin exchange rate will rise in the long term. But creating this organization would give Bitcoin even more credibility and would serve as an argument when you tell people about Bitcoin and they fear them becoming worthless.

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June 20, 2012, 08:41:20 PM
 #4

The hard problem seems to be to find the people to put in charge of the organization.

I think the harder problem would be to find the people to put any money up for it.

The reason the concept of "backing" exists is because otherwise an unbacked form of money has the potential to be devalued through inflation of its supply.  Bitcoin doesn't have that potential problem.  Therefore this "backing" doesn't really solve any problem that applies to bitcoin.

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June 20, 2012, 08:45:54 PM
 #5

Here's why this type of backing doesn't achieve anything:

If the "natural" exchange rate is higher than the backing price, there's no need to have a backing price. And if the "natural" exchange rate is lower than the backing price, everyone sells all their bitcoins to the backing organization, and Bitcoin fails.
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June 20, 2012, 08:47:17 PM
 #6

Personally I don't think Bitcoin absolutely needs to be backed up by anything else. It's a great medium of exchange as it is. But some people see the missing backing as a huge disadvantage that could result in a downward speculation spiral that would make bitcoins worthless.

As long as bitcoin can do stuff that no other medium of exchange can do, I don't see this downward spiral to 0 happening. But to ease the minds of skeptics, why don't we create our own backing for Bitcoin?
Personally I don't believe that I'm in danger of death by unicorn impalement but some people really worry about that. They walk the streets every day in constant fear of being attacked and impaled by a rogue unicorn.

In order to ease the minds of these phobics why don't we add anti-unicorn features to the blockchain?
fimp
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June 20, 2012, 08:49:00 PM
 #7

I think the harder problem would be to find the people to put any money up for it.

The reason the concept of "backing" exists is because otherwise an unbacked currency has the potential to be devalued through inflation of its supply.  Bitcoin doesn't have that potential problem.  Therefore this "backing" doesn't really solve any problem that applies to bitcoin.
Bitcoin could be devalued through other processes than inflation, through pure supply/demand for whatever underlying reasons (downward speculation spiral, a superior alternative emerges, etc.).

If the Bitcoin community is convinced that this would help Bitcoin gain trust and acceptance then a sizeable donation could be collected.


if the "natural" exchange rate is lower than the backing price, everyone sells all their bitcoins to the backing organization, and Bitcoin fails.
You miss the argument that this organization could itself be the difference between Bitcoin failing and not. If everyone trusts the organization and know that they will always be able to convert their bitcoins to x gg/BTC, they will have an easier time trusting Bitcoin.

You know, I didn't come up with this model. The dollar used to be backed by gold as well and it indeed served a function and contributed to the credibility of the dollar.

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June 20, 2012, 08:49:39 PM
 #8

Then when Bitcoin becomes a threat the banks lobby the US govt who links Bitcoin to terrorism and seizes the gold.  The seizure combined with the media reports of Bitcoin no longer backed by anything causes Bitcoin to crash overnight.

No I like decentralized just fine.  

Also the backing would be next to meaningless.

Lets be optimistic and say the backing entity got $100K worth of gold.  $100K / 21M BTC = $0.004762 (worth of gold) USD/BTC.

So instead of someone saying "I am not buying BTC for $6 it is not backed by anything" they will say "I am not buying BTC for $6 it is backed by only half a cent of gold".  If anything it could be a psychological anchor preventing BTC from rising further in value.
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June 20, 2012, 08:54:01 PM
 #9

Then when Bitcoin becomes a threat the banks lobby the US govt who links Bitcoin to terrorism and seizes the gold which combined with the media reports causes Bitcoin to crash.

+1

Bitcoin is a base value, which is backing only by how people value it. Like gold.

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June 20, 2012, 09:05:05 PM
 #10

I am quite happy with having bitcoin backed by all of us.

But lets do the numbers for 100% backing of all current bitcoins by gold.

According to bitcoinwatch the market cap of bitcoin is US$57,505,000 and the price per Troy ounce of gold is $1607 per Toz.
There are 31.1 grams in a Toz

So bitcoin en masse is currently worth 57,505,000 / 1607 * 31.1 grams = 1,113,000 grams of gold.

Gold's specific gravity is 19.3 so that is:
1,113,000 / 19.3 / 1000 litres = 57.6 litres.

My fridge is about that size capacity.

<Jim walks over to fridge. Opens door>
OMG my fridge is full of gold. Where do I send it ?
</end fantasy>

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Stephen Gornick
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June 20, 2012, 09:09:30 PM
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You know, I didn't come up with this model. The dollar used to be backed by gold as well and it indeed served a function and contributed to the credibility of the dollar.

Right, but gold didn't need to backed by silver, or vice-versa, because gold itself is scarce and the paper used for printing the dollar was not.  Therefore the paper had value because it was backed by something scarce.

Bitcoins are scarce.  The existing and future supply is known. They don't need this backing by gold or anything else.

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June 20, 2012, 09:13:11 PM
 #12

I remember a long time ago, I made a post with a similar idea, but Bitcoin would instead be "backed" by the one thing that is essential to its continued existence:  Computers.

fimp
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June 20, 2012, 09:15:16 PM
 #13

Lets be optimistic and say the backing entity got $100K worth of gold.  $100K / 21M BTC = $0.004762 (worth of gold) USD/BTC.
Right, that's not much. But gold itself is in a similar situation. Most of its value stems from its use as a store of value, but a tiny bit of the value of gold stems from its use in electronics and jewelry. Economists and gold bugs point to this "intrinsic" value, however small it may be, as the reason gold can be trusted.

Right, but gold didn't need to backed by silver, or vice-versa, because gold itself is scarce and the paper used for printing the dollar was not.  Therefore the paper had value because it was backed by something scarce.

Bitcoins are scarce.  The existing and future supply is known. They don't need this backing by gold or anything else.
Gold is not trusted only because it is scarce. It is also trusted because it has other uses than as a store of value or medium of exchange, i.e. in electronics and jewelry. Bitcoin could emulate this by creating a backing organization.

michaelsuede
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June 20, 2012, 09:26:37 PM
 #14

Bitcoin's backing stems from its cryptography, which prevents the arbitrary replication of coins, along with its other properties that allow it to act as a good medium of exchange.  Similarly, gold's "backing" stems from its scarcity, and other physical properties, that make it suitable to act as a money.  If gold could be arbitrarily replicated or if its scarcity was similar to iron, gold would cease to be a good money. Thus, it is totally pointless to back Bitcoins with anything because Bitcoins already have value due to the fundamental properties they possess.  They don't need backing like paper because paper can be easily replicated.  Initially paper currencies were nothing more than warehouse receipts for gold bullion.  People traded the receipts as if they were gold because they could be redeemed for gold at any time.

Think about what would happen if a Bitcoin represented some fixed amount of gold. For each ounce of gold a person places into a bank, that bank would then issue that person one Bitcoin.  Obviously this presents a radically different system than the present Bitcoin system, and one that is completely unnecessary anyways.  The gold held by the bank would simply sit in the vault unused for any other purpose; it would become a wasted resource.  

The purpose of a gold backed currency is to prevent arbitrary inflation of the money supply.  In fact, the U.S. could emulate a gold standard WITHOUT any gold by simply creating a monetary system where the number of dollars in circulation is set to a fixed limit.  Setting a fixed limit of dollars would achieve the same economic results as if the country was operating on a gold standard, yet the banks wouldn't need to hold any gold at all.

Bitcoin is the best of paper currencies, electronic currencies, and the gold standard all rolled into one.  Bitcoin eliminates the need for backing, allows for online transactions, is easy to store and carry, eliminates the need for banks/government to issue the currency, and retains the same anonymity as physical currencies.



fimp
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June 20, 2012, 09:26:57 PM
 #15

Stephen Gornick, to show that scarcity in itself is not enough to provide value I need only point to SolidCoin or other Bitcoin forks.

fimp
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June 20, 2012, 09:31:06 PM
 #16

The purpose of a gold backed currency is to prevent arbitrary inflation of the money supply.  In fact, the U.S. could emulate a gold standard WITHOUT any gold by simply creating a monetary system where the number of dollars in circulation is set to a fixed limit.  Setting a fixed limit of dollars would achieve the same economic results as if the country was operating on a gold standard, yet the banks wouldn't need to hold any gold at all.
The US can emulate gold in that way because they force people to pay taxes in dollars and therefrom the value of dollars are derived. Noone is forced to pay taxes in Bitcoin so Bitcoin cannot emulate the properties of gold in this fashion.

fimp
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June 20, 2012, 09:33:12 PM
 #17

Similarly, gold's "backing" stems from its scarcity, and other physical properties, that make it suitable to act as a money.
That's true for most of the value of gold, but a small amount of the value of gold stems from its use in industry and jewelry. This "instrinsic" value is what economists and gold bugs point to as the reason gold can be trusted. Bitcoin can emulate this by creating such an organization as proposed.

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June 20, 2012, 09:52:23 PM
 #18

Similarly, gold's "backing" stems from its scarcity, and other physical properties, that make it suitable to act as a money.
That's true for most of the value of gold, but a small amount of the value of gold stems from its use in industry and jewelry. This "instrinsic" value is what economists and gold bugs point to as the reason gold can be trusted. Bitcoin can emulate this by creating such an organization as proposed.

Bitcoin has "intrinsic" value as well (actually, there is no such thing as intrinsic value because all value is subjective to each person engaging in any given trade).  Bitcoin's "intrinsic" value stems from the properties it possesses which allow it to act as a money.  If Bitcoin did not have the properties it does, no one would voluntarily trade real goods for it.  Similarly, if paper currencies were not violently imposed or if paper currencies were not backed by some physical commodity, no one would accept them in exchange for real goods.

While gold can be used for jewelry, its use as a money has nothing to do with this at all.  Gold would still be a good money even if it was horribly ugly to look at.  The key properties that make up a good money are:

-scarcity
-divisibility
-recognizability  (easy to identify, hard to counterfeit, easy to verify)
-ease of transport/storage

How pretty something is doesn't make the list.
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June 20, 2012, 10:09:25 PM
 #19

Personally I don't believe that I'm in danger of death by unicorn impalement but some people really worry about that. They walk the streets every day in constant fear of being attacked and impaled by a rogue unicorn.

In order to ease the minds of these phobics why don't we add anti-unicorn features to the blockchain?

Don't know if brofist. Poni ain't hurting noponi. Cool

But this hits the nail on the head. What's the point? Bitcoin already is a backing currency, why back a backing currency with something else? The only reason would indeed be to try to satisfy people who mostly have no idea what they're talking about. That's impossible anyway, they'll always find some random phrase to "prove" whatever they like.
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June 21, 2012, 01:16:05 AM
 #20

I've suggested this before here.  The hard part is finding people to donate the backing.  Specifically, finding people to donate enough backing so that the peg sticks.  I estimate it would need to be on the order of a million USD.

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