Read now to learn how value is dependent on so much more than just what a monetary instrument is "backed" with.
If you’ve been in the Bitcoin space long enough, chances are you’ve heard people throw around the term “store of value” quite frequently. It’s a term I use myself pretty often. But what is value? And who decides what something is worth?
What Good Is A Currency’s “Backing”?
In the context of Bitcoin and other currencies, it’s common to hear people talk about a currency’s “backing”. In simple terms, backing refers to something else that the currency is indelibly linked to and from which it derives its value. Let’s look at an example:
Throughout much of the several centuries leading up to the late 1900s, fiat currencies were often backed by precious metals, usually gold or silver. People had assigned value to gold and silver for ages because they could be used in industrial applications and as jewelry. The fact that they were also relatively difficult to find, mine, and refine certainly didn’t hurt either. Long story short, since the precious metals backing fiat were recognized as valuable by most people on the planet, people decided that fiat currencies backed by the precious metals had value too.
Fiat currencies lost their gold and silver backing throughout the 1900s, culminating with the detachment of the U.S. dollar, the global reserve currency, from its gold backing in 1971. These days, fiat currencies are backed by the credit of the governments that create them. In other words, people assign value to fiat currencies in modern times because governments can force their citizens to use them and because they can tax their citizens’ real property and income, then use those taxes to pay off debts denominated in their fiat currency.
Fiat currencies are far from the only monetary instruments that have some sort of backing. For example, stocks are backed by the equity of the company for which they’re issued. In similar fashion, bonds are often backed by the assets and income of the company taking on the debt.
Most people would seem to believe that a monetary instrument being backed by something else is a good thing. But that backing is a double-edged sword. Consider for a moment what would happen if the government behind a currency or the company behind a stock or bond were to go belly up — the currency, stock, or bond would effectively have value no longer. Even if the government or company doesn’t fail and disappear, the monetary instruments tied to their existence are forever susceptible to being controlled and manipulated by the entity behind them. You can’t have one without the other.
FUD: “Bitcoin Isn’t Backed By Anything”
Bitcoin isn’t backed by any precious metal or other object, nor is it backed by any government or corporation. On the plus side, that means that Bitcoin’s value isn’t reliant on a precious metal’s supply or on a government’s or corporation’s empty promises. But unfortunately, Bitcoin’s lack of tangible backing has given rise to the idea in some people’s minds that Bitcoin has no value.
The truth is that the value of any currency, whether Bitcoin, fiat, a precious metal, or anything else, is determined by the people who use it — nothing else. Let’s briefly review some of the things for which people value Bitcoin:
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Bitcoin is censorship-resistant money, meaning it can be used even when a government tries to stop someone from spending their money.
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Bitcoin has an immutable supply cap, meaning no one can ever create more Bitcoin, no matter how powerful they think they are.
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Bitcoin is one of the strongest computer networks in the world, which contributes substantially to its decentralization.
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Bitcoin is the most open and available currency in the world. No one needs an account, phone number, ID, etc. in order to participate on the blockchain.
Each of those reasons, and many more, prove the value of Bitcoin in the minds of tens of millions of its users. No wonder Bitcoin’s use as money is growing exponentially, year after year.
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This is not financial or business advice. This newsletter and related content are for informational purposes only. Cryptocurrencies and digital assets can be risky. Always do your own research before making any sort of investment.
