people often say: “bitcoin can’t be money, it’s not backed by anything”. this is an old way of thinking that originated with paper money. Before paper money, people used precious metal coins (such as gold) because they held strong monetary properties: scarcity, durability, divisibility, portability, fungibility, and acceptability (the six monetary properties).
Paper became money because it was superior to gold in terms of divisibility and portability, but lacked scarcity. people reasoned that we could benefit from the increased divisibility/portability of paper money as long as it was redeemable in a form of money that was scarce. this is when the money needed to be “backed” by something.
Reading: Is bitcoin backed by anything
Since we exchanged money for paper money that wasn’t scarce, it needed to be backed by something that was.
Since the repeal of the gold standard, politicians have delayed the meaning of the word because our money is no longer backed by something scarce. governments say the money is backed by their “full faith and credit” as an attempt to induce populations to believe that their horrendous credit is economically equivalent to one of the world’s scarcest commodities.
so why is bitcoin backed?
nothing. sound money, like gold, is not “backed”.
Only money that lacks inherent monetary properties should be backed by other money that maintains those properties. the idea that our base layer money needs to be backed by something is thinking back to the age of paper money.
bitcoin does not require backing, it has inherent monetary properties superior to any other form of money that has ever existed. It’s important because when people think that money must be backed by something, they assume that money requires the backing of a government.
As we transition from the fiat era to hard currency, it will be important for people to remove the narrative that money is something that needs backing.
but isn’t bitcoin backed by energy?
Bitcoin is not backed by proof of work?
bitcoin is enabled by these things and many others: electricity, software, incentives, algorithms, hardware, suppliers, customers, contracts, property rights, real estate, communities, etc.
When you say it is “backed” by these things, you are implying that it is redeemable money and delaying this definition just as fiat practitioners have done. you wouldn’t say that gold is backed by mining infrastructure, international agreements, property rights, etc.
I’d say your supply is enabled by those things.
Aside: Don’t confuse market value with cash value. The market value of gold exists because it is used in electronics or as jewelry. the monetary value of gold exists because it is used as money.
The market value of gold in electronics/jewelry could disappear tomorrow and still hold monetary value (because it has strong monetary properties). market value is not necessary for something to have monetary value (as a unit, not to scale).
Ultimately, the purpose of definitions is to communicate distinctions of meaning. By saying that something is backed by energy, you are inherently reducing the ability to distinguish bitcoin from everything else that is backed by energy (because energy backs everything). if I were to tell someone with an economics background this notion, they would say: sure, it’s everything too, that’s not a good answer.
Economics is a framework for assessing value to make decisions. Discussing what makes bitcoin superior money must be understood through an economic framework. The good news is that we already have an economic framework to use: monetary properties. so that’s how you think about it: all those things that allow bitcoin to actually allow it to have superior monetary properties.
The superior monetary properties are what make bitcoin inherently sound money, and for that reason, we don’t need to back it with anything. This distinction is important because:
(1) anyone who understands monetary theory will think you’re dumb saying bitcoin is “backed” by energy/algorithms or that you don’t understand the term.
(2) the world must realize that sound money need not be backed by anything, it must be inherently superior.
(3) If you think I’m stupid and still want to use the word “backed” for things that enable bitcoin, then you need to be complete and list them all (a challenging task) when defining them for people.
In conclusion: Bitcoin is not backed by anything, it has inherent monetary properties that are enabled by the entire ecosystem of resources, capital and labor that created it.
If you’re curious to understand this better, the first three chapters of my book cover it in depth; you can find the link on my author page.
If you don’t want to buy my book right away, check out this series based on my book I wrote for bitcoin magazine that covers this concept.
this is a guest post by eric yakes. The opinions expressed are entirely my own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.