Is bitcoin backed?
While trying to answer the broad question "Is bitcoin going to become a stable, functional currency?" I have repeatedly seen the assertion [1,2] that bitcoin is backed in some way by the energy or computational power needed to create the bitcoin.
I have done very little economics, but to me being 'backed' suggests the bitcoin should be redeemable for the powered used to generate it, which is not the case. For a potential bitcoin purchaser, the only value is the future ability to spend it, like a fiat currency.
So my question is: Are the claims that bitcoin is backed meaningful? Specifically does the work required in creating the coins change the economics of the coin in any way other than controlling the rate of currency 'printing'?
[1] http://bitminer.info/ [2] http://forum.bitcoin.org/index.php?topic=57.0
3 comments
[ 4.9 ms ] story [ 28.5 ms ] threadI would like to see a digital asset which is contractually redeemable for electric power, issued by a reputable power producer. There is a general-purpose accounting device called "Loom" at https://loom.cc which allows people to create arbitrary digital assets and move them around at will, but as far as I know nobody has issued electric power on it yet. However, there is an asset redeemable for gold (in kilo bars), at http://www.gsfsystem.ch/ .
Where should this universal contract be drafted and who should be responsible to honor and uphold it?
I think that is the point of Bitcoin. There is not one set of legal rules that can control it. It doesn't need contracts, only possession.
If you own them, you can give them to others, trade, or buy things. If not, then you can't. Simple.
Fiat currencies are backed by their governing nation's word. That is it. Like in the case of Greece and others, that word can be easily broken.
I'm comfortable holding let's say 3% of my net worth in Bitcoin. As it rises, I can keep selling some off to keep my allocation at 3%. Eventually I can pay off the mortgage with it when it hits $1000. Conversely, if it drops to approximately zero, I can write off 3% of my net worth as entertainment expense.
But I'm not comfortable holding 100% of my assets in Bitcoin. I prefer to have an assortment of fiat currencies, metals, food, stocks, supplies, etc.
I would really like to see a digital asset which is contractually redeemable for electric power, issued by a reputable producer. I could easily see allocating 10% of my net worth to such a thing. Because it's redeemable, I don't have to worry about what "merchants" or "exchangers" might accept it. I wouldn't care, because I know I can always redeem it directly for electricity under the terms of the contract.
And I don't mean "dollars worth of" electricity either. I mean redeemable for a specific number of kilowatt-hours, regardless of what the "price" of that power might be in the future when measured in dollars. The word "dollar" is nowhere to be found in the contract.
Bitcoin's cool. When I read the white paper a couple of years ago, I emailed Satoshi congratulating him on the achievement. But Bitcoin is just one asset on this earth among many. Each asset has its own unique bundle of properties which make it variably desirable at different times for different people.
Gold and silver in the hand are durable, hold their purchasing power well over the long term, and can be traded offline. But that doesn't mean I'm going to put 100% of my net worth in gold and silver.
Digital gold and silver have the advantage of allowing trade over long distances. The downside is that you're relying on a redemption contract from an issuer who holds the assets on bailment. It's all trade-offs.
Fiat paper currency in the hand is fairly durable but doesn't hold its purchasing power quite as well. However, it is very easy to trade it for real goods and services, and it too can be traded offline. More trade-offs.
Digital deposit fiat currency has its own advantages and disadvantages which I need not belabor.
Bitcoin has the advantage of allowing trade over long distances, and without a central server, and without relying on any issuer to make good on a contractual redemption obligation. The downside is that ... you can't literally redeem it for anything, and must rely on a network of merchants and exchangers who may or may not wish to trade it for something you want at any given moment. More trade-offs.
Freeze-dried food has the advantage that you can actually eat the stuff. It can be traded offline, but it's not very liquid. It is fairly durable, though not as durable as metals. You can't trade it over long distances, unless you digitize claims on it. Then you're back to central servers and redemption contracts.
Ammunition has similar advantages, except for the purposes of defense and hunting instead of eating. Its value has even been rising relative to gold over the past several years.
The point of this long screed is to emphasize that there is no One True Asset into Which All of One's Wealth on Earth Must be Vested. I myself am a lazy old asset allocator, and I like to choose a variety of percentage numbers which add up to 100 and then stick with it. No single one of those numbers is 100, but I do occasionally use 0. But that too is a conscious decision not to own a particular thing at all.