Bitcoin is Backed by Nothing...And That's Kind of the Point

By DrugsandFIRE | Seeking FI | 26 Nov 2020

With a fresh bull run bringing the price above $19,000 for the first time since its historic climb back in 2017, bitcoin’s been getting a lot of press lately.  As is tradition, the FUD patrol is out once again to make sure we all know what a scam it is and that anyone choosing to part with their precious fiat to get some BTC is a fool, gambler, criminal, or some combination of the three.  But while their arguments for that are varied and usually lack any sort of rigor, I’d like to hone in on one that’s been with bitcoin since the beginning.


Bitcoin is backed by nothing and therefore worth nothing.


Really?  Let’s drill down into this one and talk about why this argument is totally irrelevant in the context of bitcoin and why its lack of “backing” actually makes the case for bitcoin even more compelling.  But first, let’s talk about what’s meant by currency backing.


The concept of backing can be traced back to the introduction of paper currencies.  For those currencies, and really most of the paper currencies issued by governments thereafter, the paper represented a claim on a physical deposit of monetary metal.  Usually the deposit was gold, but it could’ve meant some other metal or commodity with perceived value by others.  Later, under regimes such as the Gold Standard, paper currencies drifted away from being claims on specific deposits and instead, were said to be convertible (aka. redeemed) for those metals on demand from national treasuries.  When most people think of currency backing, this is what they mean.  What’s important to note here though is that in the days of backed currencies, the paper bills themselves were not seen to have any intrinsic value by themselves.  No.  The job of “store of value” was still placed on the shoulders of the monetary metals they could be converted to.  In those days, paper currencies may have had a value proposition in terms of market utility (acceptable tax payment, ease of use, transferability, divisibility, etc.), but that value proposition couldn’t stand on its own to legitimize the currency as a store of value.


Fast forward to today, and people all over the world exchange paper currencies that aren’t “backed” by anything.  Sure, you can use them to buy some gold or whatever, but the currencies themselves aren’t explicit representations of the valuable commodities they used to be.  Why is this?  Simple.  It's because they don’t need to anymore.  


Whether you agree or not, the fiat currencies of today are seen as a store of value in and of themselves and have no need to piggyback off the perception of which once imparted by the monetary metals they used to be backed by.  This is because a currency’s status as a store of value is largely determined by its utility and network effects on adoption.  Once achieved, a currency has no need for the “backed by whatever” training wheels anymore.


Going back to bitcoin, what makes it so interesting is the very fact that it’s gained acceptance as a store of value without needing those training wheels; and in fantastically short order.  While backing may have been a necessity for fiat currencies to work, as it turns out, bitcoin didn’t.  The market simply decided it was a store of value spontaneously.  When was the last time that happened?  Thousands of years ago with gold?  So the next time someone tries to play the “it’s backed by nothing card” on you, just let them know that’s kind of the point.  It’s good on its own.

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I'm a pharmacist pursuing financial independence, hence drugs and FIRE.

Seeking FI
Seeking FI

A blog dedicated to the things I've found interesting on the path to financial independence and my thoughts

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