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Is Bitcoin Backed By Anything?

January 13, 2021

One of the cool things about Bitcoin, in my opinion, is that it inevitably gets people to begin to think about the nature of money itself.

What actually.. is money?

Money is... an idea. It is an idea backed by confidence.

In the past, money came in various forms. You've probably heard the stories about past civilization using sea shells as money. For them, it worked because shells has enough scarcity to not be easily found or counterfeited (which would have inflated that "currency") and the society mutually agreed upon shells as money.

As long as you have mutual agreement on a medium of exchange and there is collective confidence in it's value, it can serve as money.

Today, we use paper. And to a very large degree, digits in digital format since most currency today isn't even physical.

That piece of paper money has no inherent value. It is just a piece of paper with ink on it. Itself, it is worth no more than toilet paper. But, it is an idea backed by confidence. That piece of paper represents an idea. We have all collectively agreed that it is a medium of exchange. That gives it collective confidence.

Now, what does it mean to be "backed" by something?

Part of the underlying confidence in the medium of exchange (currency) is that it represents something of real-world value. Historically, a lot of government (fiat) currencies have been backed by gold.

There's nothing inherently special about gold. It's just a metal. But, it happens to have some scarcity to it and mankind nominated it as "valuable". Again, it is all just mutual agreement. I guess we just thought gold was pretty or something, so we decided that's the thing. 😉

Gold has worked for a long time as an exchange of value. It has been used to "back" fiat currencies. And by doing that, it provided some stability to those currencies. It gave people the confidence they needed to continue to see those pieces of paper as valuable.

As time went on, governments began to sever ties to gold. Slowly, the role of gold backing up fiat currencies lessened. Not surprisingly, inflation went up as a result because it was gold that continues to anchor the value of that currency to reality.

In 1971, Nixon totally severed the connection between the dollar and gold. Today, the only thing that backs the US dollar is confidence. There's no backing. We have a tradition of using it, so it works. It is used in world trade, so people demand it. And, people still think the "full faith and credit of the United States government" means something. But, that's ALL that is truly backing it.

And as a result of it losing it's anchor to the real world, the dollar has been inflating ever since. Today's dollar will buy significantly less than it used to. People are losing their purchasing power.

OK, now enough with the basic history lesson. 😉

What about Bitcoin?

It isn't backed by gold.

You can't touch it.

Is it backed by anything at all?

Well, let's go back to the original concept of what money is in the first place.

It is an idea backed by confidence.

With past currencies, gold and tradition and mutual agreement all gave us the confidence. Even today when most dollars that exist are purely digital, people still have a mutual agreement of it's value.

What about Bitcoin?

Well, it's an idea. It's digital. In that aspect, it is no different than most of the dollars and currency you use ever day. Most dollars you spend never existed in physical form. In fact, as you delve more into how the US dollar actually works, you'll find that that digital dollar was basically just willed into existence. The bank just types it into a computer and.... it exists. There's literally NOTHING else to it.

But, we can easily dismiss the idea that "you can't touch it". Because, that's the case with almost all money today.

But, what is it backed by? What gives it that backstop to ensure the confidence doesn't wane over time?

With fiat, gold was the backstop of trust. With Bitcoin, that backstop is the security of the network. The Bitcoin network runs on an ever-growing network of servers all around the world and is based on pure mathematics that is unbreakable, unchangeable, incorruptible and... undeniable. Math is math... and you can't "fuzzy" it.

The whole network is totally decentralized, so nobody can screw with it or change the rules. No individual, group, organization or government controls Bitcoin or can change any aspect of it. The network works on absolutes and everything is set in stone.

So, is that a backing?

Yes. Just because you can't touch it doesn't change it. The only role gold has played in currency is to provide an agreeable backstop for trust. The way Bitcoin was designed, it provides the exact same backstop of trust... just in a different way. Math is math and the network is the network. It is literally designed so it works like natural law. You cannot alter it any more than you could use alchemy to "print" more gold.

And the thing is... the more Bitcoin grows, the more reliable it gets. The network effect is what provides the ever-growing confidence.

It is... an idea backed by confidence.

And with every passing day, as more people use Bitcoin and more miners come on and help power the network, the confidence just gets stronger.

I know, I know.

It still feels weird.

A lot of things around us are based on math. I mean, every time an airplane leaves the ground, that thing works based on math. Everything about it's workability is completely virtual... until you have the real-world plane that is built. With Bitcoin, the math and tech that makes it work is every bit as reliable, but you don't get that physical object at the end. It is 100% virtual. So... it takes getting used to.

It is not in any way hyperbole to say Bitcoin has FAR more backing than any government currency on the planet today.

It's backing is even more reliable than gold. Gold has served well, but people continue to mine more. Plus, gold is heavy, tough to transfer. Bitcoin can be moved instantly and has a totally fixed supply.

So, I hope that answers the question of... is Bitcoin backed by anything?

Absolutely.


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