What Backs Bitcoin?

Usually the first question people ask is what is backing Bitcoin? Bitcoin is backed by the faith of the people that use it but you can’t cash it in for anything or use it for something else if Bitcoin should fail to remain valuable.  Many government-backed currencies are similar.

You may hear the term “Fiat” currency, this means the currency has value by decree and that usually refers to a government-backed currency who declares it has value by “fiat.”  Some say that Bitcoin is a type of fiat currency where the users decree it has value and that value is set by the free market.

This brings up many questions about money that you may not have thought about before. What is money?  Some societies used rare sea shells or large boulders because these things were hard to counterfeit and could be traded (the big rocks would stay in one place but ownership would change).  During the gold rush gold dust was transferred directly (saloons would hire bartenders with large fingers so the “pinch” of dust would be larger).  Coins and paper money were produced that would represent holding in something such as gold.  Today, many currencies such as the US dollar are government “fiat” currencies which are backed by the decree of the government that issued the currency.  Like Bitcoin, you can’t cash in a dialed government fiat currency for anything or use it for something else.

Some are very wary of Bitcoin because you can hold it or use if for anything else. A common example is gold which can be used for jewelry, electronic equipment, etc. This brings up a large debate about how investment in gold has affected its price and made it more expensive to use for things such as electronics. Of course if you need food you cannot eat Bitcoin or gold. Large gold reserves are also held by many countries and others.

While it is not yet profitable, gold can also be manufactured from other materials, such as lead, using proton accelerators.  The number of Bitcoins, on the other hand, is set by the mathematic algorithm and cannot be changed.  (If someone does run software that changes something those coins cannot be spent as Bitcoins.  There are many such alternate Bitcoin application or “alt-coins.”  The coins have different names because they cannot be spent as bitcoins.  See CoinChoose.com).

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