What Backs Bitcoin?
Bitcoin, the decentralized cryptocurrency introduced to circulation in 2009, is becoming more popular with each passing year. While it is still not in common use, we assume that our savvy clientele may be considering Bitcoin as it slowly gains adoption among legitimate businesses and retailers. Here, we will discuss what backs Bitcoin and what that means for you.
Gold, Silver and Traditional Currencies
Historically—that is, until the early 1970s—currency as we know it was backed by a commodity. Generally, that commodity was Gold or Silver. It was in 1971 that the United States switched to fiat currency, which means that our paper money is no longer backed by physical Gold. It has a free-floating value, independent of the value of Gold, Silver or any other commodity, and it is backed by the word of the Government of the United States alone. Theoretically, this makes USD and Bitcoin equal, since Bitcoin is not backed by any commodity. However, some experts argue that what backs Bitcoin is the time “miners” spend “mining” Bitcoin, or bringing new Bitcoins into existence through the process of using the computing power of their machines to process complicated mathematical equations relating to tracking the blockchain of each individual Bitcoin. Time is a precious commodity, but it is not physical. We can’t see it or hold it or put it away for later. That Bitcoin is backed by “Time” is a great story, but time isn’t something with a cash value.
Bitcoin and Decentralization
Another feature of Bitcoin, related to its lack of backing by any commodity or government, is that it is a decentralized currency. Simply put, this means that there is no central governing body for Bitcoin. Many people contribute to the administration of Bitcoin and the keeping of its public ledger. Bitcoin’s power is distributed into the hands of many, with no one person theoretically holding too much. Centralized currency allows great power to rest in the hands of just a few—a government or a government agency, for example. The idea of dispersing power is alluring. That public ledger and blockchain certainly keeps the proverbial fox out of the henhouse. However, should Bitcoin fail, to whom would a carrier of Bitcoin appeal? There is no one to phone or e-mail. There is no office to go to. No person or persons ultimately take responsibility for Bitcoin.
This might make Bitcoin extremely exciting in the abstract. Bitcoin is a new frontier in digital currency and might certainly appeal to those who wish they had gotten to be on the forefront of other new discoveries. However, it is important to note that most experts advise keeping only as much Bitcoin currency in your Bitcoin wallet as you are prepared to lose on any given day. Please take the time to do further reading on Bitcoin as you consider adopting this new decentralized cryptocurrency.