the argument that bitcoin (btc) has no value because it is not backed by anything physical remains one of its main misconceptions.
It’s a view that has been perpetuated by the likes of billionaire tycoon warren buffett and former us president. uu. President Donald Trump—both have been quoted as saying that bitcoin is worthless.
Reading: Who backs bitcoin
But now that bitcoin ranks alongside the world’s largest currencies by market capitalization, the question begs…what exactly is backing it?
bitcoin versus fiat
Until fairly recently (the last century or so), most ordinary coins and bills were directly redeemable for gold. This is because many of the richest countries followed the gold standard, a monetary system in which governments pegged a fixed exchange rate for the national currency to gold. As part of this system, countries kept enough gold reserves in their vaults to back 100% of their circulating currency supply, ensuring that currency-for-gold exchanges were always possible.
However, this also constrained the economy in the midst of the Great Depression, as governments were unable to simply obtain more gold to expand their money supply and stimulate spending.
The system was abandoned by Australia and New Zealand in 1929-1930; Canada, Germany and the United Kingdom in 1931; and the United States partially abandoned the standard in 1933.
It wasn’t until 1971 that the United States completely abandoned the gold standard, after then-President Richard Nixon ended the United States’ interconvertibility. dollar into gold, thus overturning the bretton woods system and essentially ending the era of the gold standard.
Instead, countries switched to a fiat model, where the national currency is not backed by a commodity like gold, allowing central banks to print new money when needed. Although it has no intrinsic value, the value of fiat money is determined by changes in supply and demand, as well as the strength of the government behind it. Since governments only accept fiat currency for tax payment and tax evasion is illegal, its value is also partially held in required tax payments.
So even though fiat currencies are not formally backed by anything, we tend to buy our fiat currencies confident that they will be accepted elsewhere in exchange for goods and services. Basically, our reliance on fiat currencies creates purchasing power and therefore value for fiat currencies.
But our confidence in fiat currencies suffers from an induction problem. in other words, we assume that a sequence of events will occur as it always has, based on our previous experience. We really can’t say for sure what the value of our traditional fiat currencies holds for us. Without a currency formally linked to a commodity like gold, the value becomes a contingency rather than a guarantee.
is bitcoin backed by math?
like the us dollar, bitcoin is not backed by a physical product, but obtains its value in other ways.
Because bitcoin does not have a centralized entity that enforces its value, and it is not backed by any commodity, many people mistakenly believe this means that bitcoin has no value.
However, bitcoin currently has an individual unit value of around $30,000 and a total market capitalization, defined as the unit value multiplied by the number of bitcoins in circulation, of over $625 billion, clearly showing that is considered valuable by a large number of people.
But bitcoin isn’t actually backed by anything physical, just the complicated math that underlies its blockchain technology and controlled supply. this ensures that bitcoin’s supply remains limited and resistant to censorship, giving it some of its value. as anthony pomliano said in a cnbc panel discussion, “if you don’t believe in bitcoin, you’re basically saying you don’t believe in crypto.” For Pompliano, blockchain technology endows bitcoin with an inherent value, almost like a gold standard for cryptocurrencies.
The rest of bitcoin’s value can be attributed to the fact that it was the first successful monetary system to operate without a centralized entity pulling the strings, which means its supply cannot be forcibly inflated, it cannot be easily confiscated as gold was during the 1930s, and offers a level of financial freedom that few (if any) fiat currencies can match.
Bitcoin has also been shown to have utility value; thousands of merchants now accept it as payment for goods and services. in two countries, el salvador and the central african republic, bitcoin has been adopted as legal tender, meaning merchantshave to accept it (although in the former, at least, adoption has been irregular).
The level of confidence observed in a currency can be indicated, or even preserved, by its level of use around the world. if it is performing well relative to other fiat currencies, the us. uu. the dollar is, and will be for the foreseeable future, a currency that can be spent almost anywhere. as a result, consumers trust the dollar. purchasing power and practicality are valuable products in themselves.
On the other hand, bitcoin is still somewhat removed from the mainstream. The cryptocurrency community has come a long way since the first bitcoin transaction was spent on a pizza, but until mass adoption takes place, trust in bitcoin will ultimately not be as high or as widespread as trust in established fiat currencies.
Despite its obvious differences, bitcoin turns out to be similar to a fiat currency in that it is largely backed by consumer trust. As belief in the crypto space grows, so will confidence in bitcoin.