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.
Paper money imo is backed by regional Economy or iow labor + what labor can buy/buys/saves.
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.
This is brilliant.
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.
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.
Money is a token, a debt unit that passed on down the chain in exchange for product. Many things can and did serve as such token: gold, bank note, cowry shells. Their only 'value' is that they all are scarce resources (well, in case of bank notes less and less so) and socially accepted as a measure of debt. So can be bitcoin. In many ways bitcoin is much better money then others.
I make a tea pot. You own a goose. That is our economy. The money in economy should never go beyond the value of that goose + the tea pot. Now add the hours you work, the hours I work etc. The economy grows, but not beyond what has been produced. Now let's say you want to buy a home but the money is not there, then the government knowing that the value will exist, they push FUTURE money out in the system and indirectly lend it to the guy who is going to build the house. The economy grows, but this is more like forecasted revenue. You see E.V.E.R.Y. single dollar in this economy can be traced back to some good or service.
By the way, normally it is not government, but banks (private corporations) who 'push FUTURE money' into the system in a form of credit. Same can happen in BTC economy.
I still fail to see how BTC is fundamentally different from any other currency.
You create something. I create something. We create money to exchange these things.
You don't create money. Give it a value. Trade it. Raise its value. Then after 3 years, ask people to BUY that and use it to trade other things.
Bitcoin is nothing like money. Bitcoin is a card trading game and the card have a value now. Saying a bitcoin is like money or currency is like saying a car is like money/currency.
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.
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.
In this sense, bitcoin is exactly the same.....
I am afraid I think your answer and everyone who is trying to compare the Trust we have in today's paper money to bitcoin, is very much flawed. I want to be explained that I am wrong, but I am not convinced by your argumentation.
Imagine a country of 200 people. They each work and provide products and services to one another. They gradually value the value of theirs service rendered and production. Then they need to easily exchange cows for shoes for houses for legal advice for whatever goods and services. They then come up with a way to value these goods and services for ease of exchange. So they say your one hour of work is worth $4 then you can easily take that and buy 1 hour of legal advice + 1 piece of bread and be left with 35 cents. That representation and value-holding entity is money as we know it today. It did not just appear.
Bitcoin is the EXACT opposite. 10 people come together in the 200 people economy. They decide they create pieces of cloth and give it a value of X. Then they make X amount of those, granted the task of creating them becomes harder as you go. Then as they create more, X magically is worth 1 lawyer hour today, 4 cows more tomorrow, etc... Then after creating these many pieces of cloth, and valuing them at X, then tell ME that I can exchange my car for it.
With what we have today as money, we created goods and services, then accepted to use that as a way to exchange, hence the entirety of the money in circulation was equal to exactly the amount of Good and Services rendered, debt, etc...
With Bitcoin, it is equal to nothing other than what a few people decided and did not create anything for it.
I am sure I am wrong, but that is just how I see it. Bitcoin could very well succeed, but the only thing this would mean is that everybody was duped.
The problem that bitcoin is trying to solve is that the currency representation you're talking about does just "appear." It appears, potentially in vast quantities, whenever the government issues more of it. This is a big problem for anyone who has savings denominated in the currency.
> 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.
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.
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."
Yeah, but in the case of an economy, you create the value first, then you create the currency to help hold that created value. You do not start a country and say, here is $1 trillion. With Bitcoin, you create $1 trillion, then you say "Go buy things from other countries with it."
In any transaction the value can only be determined if the buyer thinks the product or service is valuable enough to pay for. Which is why products and companies fail all the time.
> You do not start a country and say, here is $1 trillion.
This hasn't been done in a while. But, it has been done before with a few variations. It's never pretty. Usually leads to hyperinflation. It's definitely way beyond the scope of this discussion. Though for a primer you could read up on the history of the Deutsche Mark.
> With Bitcoin, you create $1 trillion, then you say "Go buy things from other countries with it."
Actually that is excessively exaggerated scenario. At their peak $14.5 billion. In my opinion they were way above their market cap even then. I'd elaborate but that too is out of scope for this conversation.
What I can say is $14.5 billion was the speculated value, which is a different beast within itself.
Also, I think there are some gaps in your understanding of concepts such as crypto-currencies, proof-of-work and proof-of-stake.
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.
The answer for bitcoin appears to be that currently you can use it for low-friction transactions.
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.
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.