People often say, “Bitcoin can’t be money, it’s not backed by anything.” This is an old way of thinking that originated in fiat money. Before paper money, people used precious metal coins (like gold) because they retained strong monetary attributes: scarcity, durability, divisibility, portability, fungibility, and acceptability (the six monetary attributes).
Paper became money because it was superior to gold in terms of divisibility and portability BUT it lacked scarcity. People argued that as long as it is redeemable in a scarce form of money, we could benefit from the greater divisibility/portability of fiat money. This is when money needs to be “backed” by something.
Since we were converting money into paper money, which wasn’t scarce, it had to be backed by something that existed.
Since the abolition of the gold standard, politicians have delayed meaning of the word because our money is no longer backed by anything scarce. Governments say that money is backed by their “full faith and credit” to allude to populace’s belief that their horrendous credit is economically equivalent to one of the world’s scarcest commodities.
So what is bitcoin supported by?
Nothing at all. Solid money, like gold, is not “backed”.
Only money that lacks inherent monetary properties needs to be backed by other money that retains those properties. The idea that our base money must be backed by something dates back to the paper money era.
Bitcoin does not require support, it has inherent monetary properties superior to any other form of money that has ever existed. It’s important because when people think money needs to be backed by something, they assume money needs the backing of a government.
As we transition back to solid money from the fiat era, it will be important for individuals to eliminate the narrative that money is something that needs to be secured.
But isn’t bitcoin backed by energy?
Isn’t bitcoin backed by proof of work?
Bitcoin is ACTIVATED by these and many other things: 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 that definition, just as fiat practitioners have done. You wouldn’t say gold is backed by mining infrastructure, international treaties, property rights, etc.
One would say that its sustenance is made possible by these things.
Besides, don’t confuse market value with monetary value. Gold’s market value exists because it is used in electronics or as jewelry. Gold’s monetary value exists because it is used as money.
The market value of gold in electronics/jewellery could disappear tomorrow and it would still retain its monetary value (because it has strong monetary properties). Market value is not required for something to have monetary value (as a unit, not on a scale).
After all, the purpose of definitions is to communicate differences in meaning. By saying something is energy backed, you inherently reduce the ability to distinguish bitcoin from anything else that is energy backed (because energy supports everything). If I said that term to someone who knows about economics, they would say: Sure, that’s all, that’s not a good answer.
Economics is a framework for evaluating value in order to make decisions. The discussion of what makes Bitcoin superior money needs to be understood through an economic framework. The good news is that we already have an economic framework to use – monetary properties. So, here’s how to think about it: All these things that ENABLE bitcoin really enable it to have superior monetary properties.
Excellent monetary attributes 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 that if you say Bitcoin is “powered” by energy/algorithms, you will think that you are stupid or that you do not understand the term.
(2) The world needs to realize that sound money doesn’t have to be backed by anything, it has to be inherently superior.
(3) If you think I’m stupid and still want to use the word “supported” for things that make Bitcoin possible, then you need to be exhaustive and list them all (a challenging task) when defining it for humans.
Conclusion: Bitcoin is not backed by anything, it has inherent monetary properties made possible by the entire ecosystem of resources, capital and labor that created it.
If you are curious to understand this better, the first three chapters of my book go into detail about it – 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 which covers this concept.
This is a guest post by Eric Yakes. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
