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Ask HN: What backs the value of a Bitcoin? Isn't Bitcoin the only currency which is in fact backed by Nothing valuable? Paper money imo is backed by regional E

Ask HN: What backs the value of a Bitcoin? Isn't Bitcoin the only currency which is in fact backed by Nothing valuable? Paper money imo is backed by regional Economy or iow labor + what labor can buy/buys/saves.

a3voices 13y ago
Bitcoin is more similar to gold than it is to a currency.
- DrStalker 13y ago
  If you ignore the industrial uses of gold its even closer; it's something that is exchanged for other things but never used to do anything on its own.
simbolit 13y ago
The value of bitcoin, as of any other instrument of exchange, is backed by the trust that someone else will exchange it for something else in the future. Everyday goods, like corn or crude oil, additionally have intrinsic usefulness and thus gain value from this. Government issued currencies have another aspect, namely that you have to pay taxes in gov issued currency, and thus there is always someone who wants gov issued currency, thus it is easy to trust. There are also often "legal tender" laws, which force people selling to the public to accept gov issued currency. This also makes it easy to invest that trust. But basically it is just how much you (and by extension the market) believe you will be able to get for your instrument of exchange in the future that determines its value.
- philwelch 13y ago
  That's not quite how legal tender laws work. If I want to operate a business that only accepts Bitcoin, that's not illegal. You give me the Bitcoin and I give you the donut. Legal tender only applies to debts, which include things like damages from lawsuits. In fact, if you want to receive anything other than dollars in a lawsuit, that's considered "specific performance" and is not always available. For instance, if I have a contract to ship you ten tons of flour for $10,000 and I don't ship the flour, most of the time you can sue me for some dollar amount of damages. Specific performance would be if the court ordered me to ship you flour--or indeed, gold, Bitcoin, or Euros.
  - simbolit 13y ago
    I thought in France, for instance, companies may not refuse to take gov issued money as payment for their goods, but I cannot find a reference right now. So I suppose you are right. Thanks for correcting me.
    - philwelch 13y ago
      That wouldn't surprise me. The French are protective of their national institutions, and back in the day, the Franc would have been one of them. (Another, the French language, has lots of legal protections.)
derian 13y ago
I believe the idea is that both dollars and bitcoin are valued due to the collective trust of their user base. However, only the dollar is easily susceptible from the Fed which has the power to dilute the value of the money held by the dollar's user base. Personally I don't know if the argument holds in reality. For example the dollar has also ulterior valuable properties, namely that businesses are mandated by the state to accept it, meaning that you can buy everything with dollars in the US. And Bitcoin is currently very easily influenced by the core developers and the big mining pools as well as anyone with a sizable amount of cash.
Tycho 13y ago
I think what 'backs' a currency is secondary. The primary factor is 'how readily will people accept as payment.' Backing a currency with a physical asset or with government authority have been the traditoinal means of achieving this - but maybe there are other ways. People often point out that citizens can pay their taxes in dollars, so they are happy to accept them as payments. You cannot of course pay taxes in Bitcoin but interestingly there's been a virus going about recently that basically takes user data hostage and demands a ransom payment in Bitcoin. So there you have a sizeable base of economic actors who need to acquire Bitcoin to settle their ransoms.
- eru 13y ago
  > [...] but interestingly there's been a virus going about recently that basically takes user data hostage and demands a ransom payment in Bitcoin. So there you have a sizeable base of economic actors who need to acquire Bitcoin to settle their ransoms. This is brilliant.
- rokhayakebe 13y ago
  My problem is not just what backs Bitcoin, but what backs its value. Nothing. Money is backed by goods and services already created + other real things like consumption, etc... Then we had a need to create money to easily exchange between these things. Bitcoin on the other hand already comes with a random value of $650.00 usd with no good, no services previously created, no VALUE. It's just one giant gamble, in my view. Again, I am sure I am wrong, but I have yet to read anything that convinces me. EDIT: Actually it is not one giant gamble. That was the wrong analogy. Bitcoin is more like a card trading game where the players get cards for making them or solving a problem related to the game. So yes, you can later take those cards and sell them, but it really becomes the last fool game.
  - ericb 13y ago
    A bitcoin is a token which gives the user the right to transact on the bitcoin network. It derives its value from this right. The bitcoin network provides global near-instantaneous transference of ownership records for negligible transaction fees. It enables transactions to occur without a trusted third party, and also represents the advent of scriptable money. For these reasons, the right to transact on the network has value.
ars 13y ago
> What backs the value of a Bitcoin? Electricity mainly. The cost of a bitcoin is proportional to the cost of the electricity to make it. Every time a new machine comes out that is more efficient in electricity the difficulty rises such that you are back where you started.
- BlackDeath3 13y ago
  https://en.bitcoin.it/wiki/Myths#Bitcoin_is_backed_by_processing_power https://en.bitcoin.it/wiki/Myths#Bitcoin_is_backed_by_proces... What backs the US dollar? Sure, you've got FDIC insurance and all of that, but it isn't backed by anything in the sense that many people are thinking.
bushido 13y ago
> What backs the value of a Bitcoin Value is always backed by perception of individuals(micro) and groups of individuals(macro). A change in perception of these groups manifests as volatility. > Isn't Bitcoin the only currency which is in fact backed by Nothing valuable Depends on what you perceive as valuable. Theoretically, it could be argued that BTCs value ought to be as valuable as the time, equipment and energy dispensed in mining it + a perceived premium or discount. In that it is similar to most commodities and currencies. Further, if someone(Alice) doesn't mine but rather buys bitcoins, then on an individualist scale the price paid is the notional value of the bitcoin's that they hold. Next, Alice just need one person willing to accept her perceived value in exchange of goods and services rendered. > Paper money imo is backed by regional Economy You're right. But the same may hold true for bitcoin in the future, if they can develop economies that accept it at all stages of production and final use. They only such economy that exists in part is for mining equipment. Unfortunately, that too is exposed to other(less volatile) currencies which render it inefficient.
- wintersFright 13y ago
  Money/labour input does not equal value. I could spend 10 years pulling all the grass from my backyard and sorting it from longest to shortest in length. A lot of effort went into it. Doesn't make it valuable. Paper money is backed by the willingness of other people to price their goods and services in it. If people stop pricing their goods and services in it then it is no longer money. eg: a Zimbabwe dollar is no longer money. No one will exchange anything for it except for a novelty value. Generally vendors exchange those paper monies for goods and services due to the requirement to pay taxes in fiat dollars. Vendors aren't required to sell for dollars, they can sell for whatever medium of exchange they want. It's just convenient to do so due to the tax reason. That reason alone can't save a currency though. eg: $Zim.
  - bushido 13y ago
    > Money/labour input does not equal value. I could spend 10 years pulling all the grass from my backyard and sorting it from longest to shortest in length. A lot of effort went into it. Doesn't make it valuable. Doesn't make it valuable to 'you', but if you found someone willing to pay you with another object of value, that's another story. Better answered by another user here "money is backed by the willingness of other people to price their goods and services in it.Vendors aren't required to sell for dollars, they can sell for whatever medium of exchange they want. It's just convenient to do so."
Estragon 13y ago
Another way to ask what backs a currency is "Why would I want to acquire this currency, even if I had alternative methods for procuring the goods and services I want?" For a national currency, the answer is that the government puts a gun to your head if you don't pay your taxes in it. A national currency is a very agreeable way for a government to express its power through taxing and spending. The answer for bitcoin appears to be that currently you can use it for low-friction transactions.
eof 13y ago
This is an interesting question but there is not really a definitive answer in the way it is asked. "Backed by" gold has a very literal meaning in the sense that you can trade something for gold. "backed by government" doesn't translate since you cannot trade money for government (unless you're a lobbyist!); but the fact that an entity with a monopoly on force accepts a certain type of paper to relieve debts in a sense "backs" it.. or at least gives reason for people to use; not to mention you are legally obliged (at least in the states) to accept us currency for a debt. You say yourself > Paper money imo is backed by regional Economy or iow labor + what labor can buy/buys/saves. In this sense, bitcoin is exactly the same. And this is actually more important than the government part; as evidenced by every fiat currency that has ever undergone hyperinflation. You can pay taxes with bolivars in Venezuela; but everyone would rather have dollars. The local economy runs almost entirely on bolivars; people are paid in bolivars, yet.. people want dollars. Why? You can buy things with bitcoin; you can trade it for labor, services, goods. this begs the question of course.. why would anyone trade it in the first place? This is what the 'regression theorem' [1] tries to answer; not for bitcoin, but for everything that becomes a medium exchange. The notion that money needs to be "backed by" something is just conjecture and a relatively recent idea. It only comes about when we use fiat currencies; when gold coins were used, or cowrie shells in africa.. no one asked what a cowrie shell was backed by. The real question is "what makes bitcoin sound money?" Opinions differ on that and I will leave the question to the reader; but, there is no fundamental difference between a US dollar and a bitcoin in terms of 'backing'. A government decree is worth nothing if you don't have sound money, and sound money is sound regardless of a government decree; again, this is evidenced by countless government-mandated currencies becoming worthless and bitcoin, gold, silver, cigarattes, cowrie shells, and rai stones acting as currency without anyone ever declaring them to be currency. 1. http://wiki.mises.org/wiki/Regression_theorem http://wiki.mises.org/wiki/Regression_theorem
- dredmorbius 13y ago
  > as evidenced by every fiat currency that has ever undergone hyperinflation. Currencies controlled by sovereigns devalue. It happened in Rome (see Joseph Tainter's description of the silver denarius's 94% devaluation), in England (Adam Smith writes at length on British currency, its tri metallic standard (copper, silver, and gold), and the devaluations of same), and elsewhere. Devaluation of currency is a symptom of a deeper cause. It's not an intrinsic property of fiat currency alone. And the inability to, say, devalue government debts denominated in Bitcoin or other digital currency not subject to deflation would result in some other expression of the problem (likely a sovereign default), which would wipe out wealth as well, though with a different allocation of losses.

a3voices 13y ago

Bitcoin is more similar to gold than it is to a currency.

DrStalker 13y ago
If you ignore the industrial uses of gold its even closer; it's something that is exchanged for other things but never used to do anything on its own.

simbolit 13y ago

The value of bitcoin, as of any other instrument of exchange, is backed by the trust that someone else will exchange it for something else in the future. Everyday goods, like corn or crude oil, additionally have intrinsic usefulness and thus gain value from this. Government issued currencies have another aspect, namely that you have to pay taxes in gov issued currency, and thus there is always someone who wants gov issued currency, thus it is easy to trust. There are also often "legal tender" laws, which force people selling to the public to accept gov issued currency. This also makes it easy to invest that trust. But basically it is just how much you (and by extension the market) believe you will be able to get for your instrument of exchange in the future that determines its value.

philwelch 13y ago
That's not quite how legal tender laws work. If I want to operate a business that only accepts Bitcoin, that's not illegal. You give me the Bitcoin and I give you the donut. Legal tender only applies to debts, which include things like damages from lawsuits. In fact, if you want to receive anything other than dollars in a lawsuit, that's considered "specific performance" and is not always available. For instance, if I have a contract to ship you ten tons of flour for $10,000 and I don't ship the flour, most of the time you can sue me for some dollar amount of damages. Specific performance would be if the court ordered me to ship you flour--or indeed, gold, Bitcoin, or Euros.
- simbolit 13y ago
  I thought in France, for instance, companies may not refuse to take gov issued money as payment for their goods, but I cannot find a reference right now. So I suppose you are right. Thanks for correcting me.
  - philwelch 13y ago
    That wouldn't surprise me. The French are protective of their national institutions, and back in the day, the Franc would have been one of them. (Another, the French language, has lots of legal protections.)

derian 13y ago

I believe the idea is that both dollars and bitcoin are valued due to the collective trust of their user base. However, only the dollar is easily susceptible from the Fed which has the power to dilute the value of the money held by the dollar's user base. Personally I don't know if the argument holds in reality. For example the dollar has also ulterior valuable properties, namely that businesses are mandated by the state to accept it, meaning that you can buy everything with dollars in the US. And Bitcoin is currently very easily influenced by the core developers and the big mining pools as well as anyone with a sizable amount of cash.

Tycho 13y ago

I think what 'backs' a currency is secondary. The primary factor is 'how readily will people accept as payment.' Backing a currency with a physical asset or with government authority have been the traditoinal means of achieving this - but maybe there are other ways. People often point out that citizens can pay their taxes in dollars, so they are happy to accept them as payments. You cannot of course pay taxes in Bitcoin but interestingly there's been a virus going about recently that basically takes user data hostage and demands a ransom payment in Bitcoin. So there you have a sizeable base of economic actors who need to acquire Bitcoin to settle their ransoms.

eru 13y ago
> [...] but interestingly there's been a virus going about recently that basically takes user data hostage and demands a ransom payment in Bitcoin. So there you have a sizeable base of economic actors who need to acquire Bitcoin to settle their ransoms. This is brilliant.
rokhayakebe 13y ago
My problem is not just what backs Bitcoin, but what backs its value. Nothing. Money is backed by goods and services already created + other real things like consumption, etc... Then we had a need to create money to easily exchange between these things. Bitcoin on the other hand already comes with a random value of $650.00 usd with no good, no services previously created, no VALUE. It's just one giant gamble, in my view. Again, I am sure I am wrong, but I have yet to read anything that convinces me. EDIT: Actually it is not one giant gamble. That was the wrong analogy. Bitcoin is more like a card trading game where the players get cards for making them or solving a problem related to the game. So yes, you can later take those cards and sell them, but it really becomes the last fool game.
- ericb 13y ago
  A bitcoin is a token which gives the user the right to transact on the bitcoin network. It derives its value from this right. The bitcoin network provides global near-instantaneous transference of ownership records for negligible transaction fees. It enables transactions to occur without a trusted third party, and also represents the advent of scriptable money. For these reasons, the right to transact on the network has value.

ars 13y ago

> What backs the value of a Bitcoin? Electricity mainly. The cost of a bitcoin is proportional to the cost of the electricity to make it. Every time a new machine comes out that is more efficient in electricity the difficulty rises such that you are back where you started.

BlackDeath3 13y ago
https://en.bitcoin.it/wiki/Myths#Bitcoin_is_backed_by_processing_power https://en.bitcoin.it/wiki/Myths#Bitcoin_is_backed_by_proces... What backs the US dollar? Sure, you've got FDIC insurance and all of that, but it isn't backed by anything in the sense that many people are thinking.

bushido 13y ago

> What backs the value of a Bitcoin Value is always backed by perception of individuals(micro) and groups of individuals(macro). A change in perception of these groups manifests as volatility. > Isn't Bitcoin the only currency which is in fact backed by Nothing valuable Depends on what you perceive as valuable. Theoretically, it could be argued that BTCs value ought to be as valuable as the time, equipment and energy dispensed in mining it + a perceived premium or discount. In that it is similar to most commodities and currencies. Further, if someone(Alice) doesn't mine but rather buys bitcoins, then on an individualist scale the price paid is the notional value of the bitcoin's that they hold. Next, Alice just need one person willing to accept her perceived value in exchange of goods and services rendered. > Paper money imo is backed by regional Economy You're right. But the same may hold true for bitcoin in the future, if they can develop economies that accept it at all stages of production and final use. They only such economy that exists in part is for mining equipment. Unfortunately, that too is exposed to other(less volatile) currencies which render it inefficient.

wintersFright 13y ago
Money/labour input does not equal value. I could spend 10 years pulling all the grass from my backyard and sorting it from longest to shortest in length. A lot of effort went into it. Doesn't make it valuable. Paper money is backed by the willingness of other people to price their goods and services in it. If people stop pricing their goods and services in it then it is no longer money. eg: a Zimbabwe dollar is no longer money. No one will exchange anything for it except for a novelty value. Generally vendors exchange those paper monies for goods and services due to the requirement to pay taxes in fiat dollars. Vendors aren't required to sell for dollars, they can sell for whatever medium of exchange they want. It's just convenient to do so due to the tax reason. That reason alone can't save a currency though. eg: $Zim.
- bushido 13y ago
  > Money/labour input does not equal value. I could spend 10 years pulling all the grass from my backyard and sorting it from longest to shortest in length. A lot of effort went into it. Doesn't make it valuable. Doesn't make it valuable to 'you', but if you found someone willing to pay you with another object of value, that's another story. Better answered by another user here "money is backed by the willingness of other people to price their goods and services in it.Vendors aren't required to sell for dollars, they can sell for whatever medium of exchange they want. It's just convenient to do so."

Estragon 13y ago

Another way to ask what backs a currency is "Why would I want to acquire this currency, even if I had alternative methods for procuring the goods and services I want?" For a national currency, the answer is that the government puts a gun to your head if you don't pay your taxes in it. A national currency is a very agreeable way for a government to express its power through taxing and spending. The answer for bitcoin appears to be that currently you can use it for low-friction transactions.

eof 13y ago

This is an interesting question but there is not really a definitive answer in the way it is asked. "Backed by" gold has a very literal meaning in the sense that you can trade something for gold. "backed by government" doesn't translate since you cannot trade money for government (unless you're a lobbyist!); but the fact that an entity with a monopoly on force accepts a certain type of paper to relieve debts in a sense "backs" it.. or at least gives reason for people to use; not to mention you are legally obliged (at least in the states) to accept us currency for a debt. You say yourself > Paper money imo is backed by regional Economy or iow labor + what labor can buy/buys/saves. In this sense, bitcoin is exactly the same. And this is actually more important than the government part; as evidenced by every fiat currency that has ever undergone hyperinflation. You can pay taxes with bolivars in Venezuela; but everyone would rather have dollars. The local economy runs almost entirely on bolivars; people are paid in bolivars, yet.. people want dollars. Why? You can buy things with bitcoin; you can trade it for labor, services, goods. this begs the question of course.. why would anyone trade it in the first place? This is what the 'regression theorem' [1] tries to answer; not for bitcoin, but for everything that becomes a medium exchange. The notion that money needs to be "backed by" something is just conjecture and a relatively recent idea. It only comes about when we use fiat currencies; when gold coins were used, or cowrie shells in africa.. no one asked what a cowrie shell was backed by. The real question is "what makes bitcoin sound money?" Opinions differ on that and I will leave the question to the reader; but, there is no fundamental difference between a US dollar and a bitcoin in terms of 'backing'. A government decree is worth nothing if you don't have sound money, and sound money is sound regardless of a government decree; again, this is evidenced by countless government-mandated currencies becoming worthless and bitcoin, gold, silver, cigarattes, cowrie shells, and rai stones acting as currency without anyone ever declaring them to be currency. 1. http://wiki.mises.org/wiki/Regression_theorem http://wiki.mises.org/wiki/Regression_theorem

dredmorbius 13y ago
> as evidenced by every fiat currency that has ever undergone hyperinflation. Currencies controlled by sovereigns devalue. It happened in Rome (see Joseph Tainter's description of the silver denarius's 94% devaluation), in England (Adam Smith writes at length on British currency, its tri metallic standard (copper, silver, and gold), and the devaluations of same), and elsewhere. Devaluation of currency is a symptom of a deeper cause. It's not an intrinsic property of fiat currency alone. And the inability to, say, devalue government debts denominated in Bitcoin or other digital currency not subject to deflation would result in some other expression of the problem (likely a sovereign default), which would wipe out wealth as well, though with a different allocation of losses.