Is Bitcoin backed by anything real?

Bitcoin

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Nigel Pereira finds out what makes Bitcoin a superior form of currency to anything we have seen before as he compares its monetary properties with fiat money.


Most people want to slap themselves when they read posts that say "If you had invested $100 in Bitcoin in 2010 it would be worth over $48 million today," especially those who were initially dismissive of cryptocurrency. While it is true that 2010 would have been an excellent time to invest in Bitcoin, don't beat yourself up too much over the fact that you couldn't see it happening, not a lot of people could. In fact, Warren Buffet, one of the most successful investors in the world, called cryptocurrency an asset that doesn't create anything while Jamie Dimon, CEO of JP Morgan Chase called Bitcoin a fraud.

Why we needed a gold standard

Erik Yakes, Wall Street Analyst and author of The 7th Property stated in a blog post that his initial assessment of Bitcoin was that it was a speculative asset with no fundamental value. He then goes on to explain in detail how this is because our basic concept of money is built on the fact that it needs to be backed by something of value. This is because most of us use paper money or digital money through payment apps like G-Pay where you pay in whatever the national currency is, the value of which has historically depended on how much gold your country has in reserve.

Is modern currency backed by gold?

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While paper money is easier to carry around, it isn't scarce and hence the concept that money needs to be backed by something of value. If you think the money in your pocket or your bank account is still backed by something tangible, think again. We now live in a world of fiat currencies where the only thing backing our money is the word of the government. This was done so that governments could print currencies and banks could loan more money to individuals and businesses. Printing money that isn't tied to a national stockpile of gold or silver is a risky business.

Risky because there is a pretty good chance of devaluation due to inflation like we have seen in countries like Venezuela where the currency has pretty much become worthless. Another more recent example is the central bank of Sri Lanka which printed more money in a failed attempt to keep interest rates low resulting in an 18.8% inflation rate and virtually bankrupting the small island nation. The reason why governments can do this is that our money is centralized which means it is governed by a central authority like the Reserve Bank of India or the Federal Reserve Bank in the US.

Decentralized money

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Getting back to cryptocurrency and Bitcoin, in particular, we're talking about superior monetary properties - the likes of which the world has never seen before, the cutting edge of digital currency. In addition to all the basic characteristics that make gold a good sound currency that needs no backing, Bitcoin brings so much more to the table. Bitcoin was born from a need for a decentralized currency when the US Federal Bank's decision to use quantitative easing to bail out banks during the 2008 financial crisis was questioned by many. A lot of people also questioned why one entity should have complete control over the supply of money.

Unlike our regular money (fiat money) that's centralized and can be manipulated by governments by changing interest rates and printing more money, Bitcoin is built on a decentralized peer-to-peer network. This means nobody owns the Bitcoin network and it is powered by Bitcoin users all around the world with no central authority or the involvement of governments. While this has a major drawback, i.e., it could be tailormade for illegal activity, the upside is that it literally works like democracy, and any kind of changes to the system, whatsoever, need to be agreed upon by a majority of users.

The monetary properties of Bitcoin

Similar to the way gold is scarce and limited, only 21 million bitcoins are to be minted at a fixed rate and these coins are incredibly difficult and expensive to mine. Additionally, the blockchain technology that encrypts each transaction and links it to the previous block is impossible to crack and creates an immutable ledger of transactions that can never be tampered with. Lastly, and most importantly, the ability to move large amounts of money over a regular internet connection, cheaply, and instantly without the hassle of having to ask a government authority for permission makes Bitcoin a superior form of currency to anything we have seen before.

About the author:
With a background in Linux system administration, Nigel began his career with Symantec Antivirus Tech Support. He has now been a technology journalist for over 6 years and his interests lie in Cloud Computing, DevOps, AI, and enterprise technologies.

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