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Why Bitcoin Doesn’t Need to be Backed by Anything

Why Bitcoin Doesn’t Need to be Backed by Anything

Is cryptocurrency just one big short-lived scam destined to fail? Or is it the next generation of money? Will it replace all currency as we know it in 10 or 20 years? Or will it all just flop and go away by this time next year? I am sure you are hearing compelling voices on both sides of this debate.

Here are some quotes to keep in mind when someone claims cryptocurrency is just another flash in the pan, a giant bubble or an elaborate scam destined to go nowhere:

“There is no reason anyone would want a computer in their home.” — Ken Olson, president, chairman and founder of Digital Equipment Corp. (DEC), maker of big business mainframe computers, arguing against the PC in 1977.

“Lee DeForest has said in many newspapers and over his signature that it would be possible to transmit the human voice across the Atlantic before many years. Based on these absurd and deliberately misleading statements, the misguided public … has been persuaded to purchase stock in his company …” — a U.S. District Attorney, prosecuting American inventor Lee DeForest for selling stock fraudulently through the mail for his Radio Telephone Company in 1913.

“There is practically no chance communications space satellites will be used to provide better telephone, telegraph, television, or radio service inside the United States.” — T. Craven, FCC Commissioner, in 1961 (the first commercial communications satellite went into service in 1965)

The truth is the people claiming bitcoin is going away some day are saying that because, much like the people in the above quotes, they don’t fully understand the technology and they don’t have a vision for its future utility.

These people will tell you that money needs to be backed by something, and bitcoin is backed by nothing. Both of those claims are arguably false.

Does money really need to be backed by something? If so, what is the dollar backed by? Remember, we fully abandoned the gold standard in 1972 with Nixon. If the dollar is backed by anything, it is backed by faith in the United States government and its ability to tax its citizens, and the citizenry’s ability and willingness to pay. Ditto for every other modern currency on the planet. This is what is meant by “fiat currency” – it is currency that has value by government fiat, or decree. You must pay your taxes in that government’s currency, and ultimately that is the only real source of value in it.

If you see the flaws and instability inherit in that system, you are already a fan of gold and precious metals. You probably own some and wish you owned more. You probably should own more.

But we constantly preach diversification. You may be considering diversifying into the cryptocurrency space. Do not be put off by the fact that bitcoin is backed by “nothing” because the truth is, it IS backed by something - something far more powerful than a government’s promise.

It is backed by transparency.

Cryptocurrencies are backed by the blockchain. The blockchain is an accounting ledger stored on the internet which is both public and anonymous. You can see that trades and exchanges are being made and not necessarily by whom, much like the stock market. You know THAT trades are being made that affect value. You don’t know who is behind the trades. The blockchain is similar. It introduces the concept of trustlessness, meaning you don’t have to trust anyone for your transaction to be successful. It is all public and verifiable on the blockchain. This is very powerful. This solves many many problems with commerce and payment systems, if you think about it.

If you understand this technology, it also makes you scratch your head when someone claims to be backing their cryptocurrency with X. Is there a blockchain involved? How do you back a cryptocurrency with something more powerful than that?

We don’t know what the future holds for cryptocurrencies. Governments are still waffling between attacking them and harnessing them. It is entirely possible that this is a technology so powerful governments will eventually have no choice but to embrace cryptocurrencies and find a way to integrate the power of the blockchain into their finances. We see a lot of growing pains before that point is reached, but in the mean time there is still time to be an early adopter now that crypto has your attention.