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Comment by digitailor | Hacker News Reader

>> Bitcoin is different in that is the purest form of a fiat currency in the sense that it is backed by nothing and thus has no intrinsic value whatsoever.

It's backed by the tremendous amount of electricity required to run the transaction processing network (ie. "mining"). Remember this is the world's largest distributed supercomputer.

BTC is a proxy for electricity, that's why mining equipment ended up at ASICs so quickly- in mining, less W = more $$. By a lot.

The USD is currently backed by absolutely nothing. There is no way we could print the $2000 trillion dollars[1] of derivatives now in existence. You couldn't cash out all of it or even too much of it.

The USD is "fake". And high finance is not ignorant to this fact, at all.

[1] Or more, no one actually knows. Goldman Sachs would have the best idea of this.

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The costs of producing BTC or USD are not their backings. You can't exchange your BTC back into electricity.

The USD (and usually most other currencies) aims to be indirectly backed by the corresponding amount of goods they represent within the currency zone and their legal status.

BTC isn't even indirectly backed. It just exists. And that's okay for its purpose.

Re your comment about currency production costs: A spike in electricity costs would directly effect existing bitcoins' value. A spike in cloth paper prices would not cause a meaningful change in the value of already-printed dollars. And the price of the dollar would spike with electricity costs indirectly. They're not the same, it's an invalid comparison that neatly evades their inherent technological and conceptual differences.

"Store of exchange-value" != currency, and BTC is currently behaving best in that role. Admirably, really- see how it's spreading like hotcakes in China. That's as a store of exchange value, not a currency.

You can't turn your gold "back into" ore or your diamonds "back into" carbon. The cost of an airline ticket is mostly determined by the current price of fuel.

When BTC starts to be used as a currency in earnest we can revisit the issue. Although at that point, you will be able to exchange your BTC back into electricity or other commodities through speculation or arbitrage. Which you can actually do directly right now if you know the right people, anyway. Profitably.

>> A spike in electricity costs would directly effect existing bitcoins' value

How?

Please explain?

It makes mining more expensive, and some people may be switched off mining as a result, but the same number of BTC will be made.

That means the rate of inflation of bitcoins will slow down, thereby causing a spike in the value of existing bitcoins.

>> That means the rate of inflation of bitcoins will slow down, thereby causing a spike in the value of existing bitcoins

Nope, the rate of bitcoin generation is fixed, it's nothing to do with how many people mine or what the hash rate is.

For up to about two weeks, until it adjusts to the new, lower norm, and de/inflation continues at the same rate as before. But technically true over that period, yes.

You can't exchange your BTC back into electricity.

Huh? Why not? Surely you could just buy some solar panels with bitcoins, or convert them to another currency and then buy electricity from the grid.

By that reasoning, I can convert my USD into donuts, and hence the USD is backed by donuts, hence the term "dollars to donuts".

Well, it is partly backed by donuts, along with any other commodities or instruments of value that it can be easily exchanged with.

Which really puts the lie to the idea of currency being "backed by" a scarce resource at all, which is the main premise of goldbugs. I'm totally okay saying that a currency is backed by the entire economy of goods being exchanged for it myself.

The meaning of a backed currency is that it's backed by the issuer with a specific commodity (or service). You can go to the issuer and exchange the money ("symbol of value") into the real thing ("value").

With BTC you can't go to some miner (=issuer) and exchange it back into the electricity that was used to produce it.

But I can't expect that I will be able to exchange the BTC for a fixed amount of electricity, which is the same as the fixed amount of electricity I originally exchanged for BTC. Hence BTC is not convertible, and not "backed"

I can buy gold with the US dollar, but it doesn't mean the US dollar is backed by gold.

That's a tortuously inefficient way to get electricity.

Surely it is just what bitcoin miners have been doing anyway, the difference remaining being their profit.

The USD is backed by the material value of everything USA, at a minimum. It's practically impossible for the USD to go to absolute zero, there's still some gold in the reserves and oil and mining to be done at absolute worst.

Obviously our debts exceed this, but that's a different issue. Say everyone cashed in at once - they'd get a percentage of our debts, not zero, since there's still material value.

You can't "undo" Bitcoin's power -> money exchange, though. There's no gold sitting in vaults providing some real, physical insurance. If I lift this brick, I've done work (but nobody cares) but even that has intrinsic value as it can be "redeemed" by lowering it, powering something. Bitcoin is different.

US Debts do not exceed the value of everything in the US.

They barely exceed 1 year's economic productivity from the US (~15.58 trillion USD).

And since the US is not going to stop being a country any time soon (and such a thing would be a calamity which makes national debt completely irrelevant anyway) it has a very long-term ability to make repayments.

And this is ignoring the fact that each year the US basically reinvests heavily, since GDP grows while the debt does not (necessarily). For example, current GDP growth of 2.2% means the US GDP increases by ~$344 billion per year. Conversely the value of all US debt per year decreases due to inflation - currently about 1.2% meaning the US debt effectively decreases by about $188 billion USD per year.

This is all somewhat beside the point, but it pains me to see people proposing the US has debts exceeding its capital and productive value as an entire country.

One year's worth of productivity does not mean it's redeemable. I'm not sure what the immediate material assets of the USA are, but it's substantially less than the USA is worth, yes.

And anyway, I'm talking absolute worst value, not any sane measure.

If the U.S. government fell, any bodies of power that arose in the aftermath would be quite likely to repudiate the debts of the old government. So no, the dollar isn't quite backed by the material value of everything in the U.S.

It is backed by the stability of the U.S. government though.

True, though it won't fall in an instant, so there's some warning. And other governments seem likely to hold at least some power over any brand-new government, so it's still unlikely/impossible that they'll get nothing back from the debts.

There are also examples of post-fiat currencies. Immediately following the toppling of Saddam Hussein there was still economic activity denominated in the old Iraqi currency, most probably on the assumption that it would be convertible at some rate with whatever came next.

There's also a certain amount of inertia. If I stop taking your old Iraqi currency, you'll stop taking my old Iraqi currency, so it's worth a lot to me to maintain the fiction, to believe really hard that the old fiat currency is still meaningful.

>> It's backed by the tremendous amount of electricity required to run the transaction processing network (ie. "mining").

That's not a backing, that's gone.

>> Remember this is the world's largest distributed supercomputer.

Doing make-work to protect itself against other supercomputers.

BTC is no different from anything else.

>> There is no way we could print the $2000 trillion dollars[1] of derivatives now in existence.

This is a red herring. You also couldn't print the money to pay for all the patents now in existence. Or all the copyrights in existence. Or even all the software now in existence. These things still get bought and sold in USD on a regular basis.

>> The USD is currently backed by absolutely nothing.

At the base, USD are backed by the fact that one can only pay taxes to the US in USD and US bonds are denominated in USD.

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