Topic: What's the best answer to this question ? "What is its backing? " - page 2. (Read 5360 times)

Didn't I basically say the same thing?

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 ?

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.

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

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).

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.

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

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?

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/


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.

Show them the hardware isle.

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

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?

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.

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 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.

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

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".

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.

Close enough for me.

s/scarcity/limited supply/