One of the debates surrounding Bitcoin today is whether it is backed by something. Some people are skeptical about purchasing Bitcoin, basing their claims on a lack of backing. Since there is nothing physical about Bitcoin, the assumption is that the cryptocurrency is not backed by anything, and therefore a bubble that will burst. This fear was further escalated by the falling of Bitcoin market value in 2017, with skeptics wondering whether the speculative bubble is finally popping.
Bitcoin is unregulated. Much of the hype around Bitcoin revolves around getting rich by trading it. The price of the crypto can rise or fall, and traders have to wait for the opportune moment to trade and gain profits. The value of Bitcoin is also not derived from any other commodity. When you purchase Bitcoin, you rely on a complicated network since the crypto mining relies on a self-regulatory algorithm. It is this algorithm that determines how the new blocks will be mined after every ten minutes. Bitcoin uses the complex algorithm during crypto mining to reduce any chance of fraud and enhance security.
The myth of fiat currency
Some arguments on the intrinsic value of Bitcoin claim that fiat currencies such as dollars have backing because they have inherent value. The fiat currencies have the support of a government in place, including military power. Since no government entity backs Bitcoin compared with the generic currencies, some people have questioned whether it is the most attractive investment. This introduces discussions on the intrinsic value of Bitcoin.
The intrinsic value of fiat currency is based upon the fact that without dollars, you cannot pay taxes. The difference between cryptocurrencies and US dollars is that Bitcoin is digital, but most importantly, its disintermediated. Bitcoin is different from fiat currencies because it is not insured by governments such as US bank deposits. Bitcoin is stored online and does not have the same protection as money in a physical bank account. For example, companies can provide a digital wallet to store your cryptocurrency. However, it has higher security through the commercial properties that make it valuable. The value of Bitcoin has been argued based on the fact that one Bitcoin will demand more dollars.
At the same time, having the backing of the government and military does not make a currency value. There are many cases of countries with governments and authority tax, yet the currencies have been deteriorating. This debunks the myth of fiat currency being valuable due to government backing. However, most fiat currencies around the world experience inflation, which is an example of flaws that cannot be associated with Bitcoin.
What is Bitcoin backed by?
The meteoric rise of Bitcoin has made it difficult even for people in the highest spheres of government, technology, and finance to ignore. As such, several people are emerging to argue against the cryptocurrency as a bubble. Experts believe the value of any currency is measured by how well it can be used to transact business. Based on this claim, skeptics believe Bitcoin fails to measure up to the component of a currency as a medium of exchange. However, contrary to these beliefs, Bitcoin is supported by several factors outside the physical elements. Some of these factors include monetary policy, scarcity, the utility of value, and the security measures.
A global system can work based on confidence and not necessarily a physical structure. Trust in monetary policy is the most important factor that backs Bitcoin. While some people believe Bitcoin is not supported by anything, the truth is that the credibility of its monetary properties supports the cryptocurrency. It is backed by the confidence in its monetary policy that is fixed into the math or code of blockchain software. The Bitcoin users are assured that there is a solid form of scientific backing behind the crypto, making it incorruptible. These monetary policies cannot be changed by anyone since there is no centralized authority.
The monetary properties of Bitcoin make it incredibly valuable as a means of exchange. The features such as durability, portability, and divisibility are inherent properties of Bitcoin that make it superior to the fiat money systems. In essence, the value of Bitcoin is shown by being easily transferable compared to the fiat currencies. For example, anyone in the world can get Bitcoin by engaging in the mining process, but not anyone can get US dollars. Additionally, Bitcoin is an asset class of its own and not pegged to any other currency. Transactions are made without a middle person, which means central banks are not part of the operations. Bitcoin does not flow through the traditional banking system. Instead, it flows from one computer wallet to another.
A decentralized system of rules
Second, besides reliance on monetary policy, Bitcoin is supported by a decentralized network of proof-of-work-based coin generation and allocation rules. Bitcoin’s value is championed by the lack of an authoritarian system to dictate transactions. It uses peer to peer technology for payments. Since Bitcoin is stateless, its valuation is due to the entry of fiat money. As such, Bitcoin is deflationary instead of inflationary in the case of fiat currencies.
No one owns the Bitcoin network. Instead, it is determined and controlled by users based on how they use the system. This system of decentralized voting in anarchy is what we call the Nakamoto Consensus. It is the spontaneous order of all individual actions within the chaos that results in consensus building and moving to the next block every 10 minutes.
Security of Bitcoin
Bitcoin is backed by security, where it runs on a highly secure network. The security in the system continues to grow day by day to prevent fraud and build trust. Since Bitcoin relies upon the trust from supporters, security is an essential component of the cryptocurrency. The transaction history in Bitcoin is securely sequenced to make it difficult to alter any data. The efficiency of the proof of work is based on how well it protects. Proof of work explains the security of Bitcoin transactions. The proof of work was invented to change the formation of consensus in Bitcoin minors during the mining process. It helps build trustworthiness that is the basis of Bitcoin to create value. In other words, this cryptocurrency relies upon the computation of achieving agreements between people.
Proof of work is an essential component of censorship resistance and immunity. It is the value of information immunity and the rebuff against censorship that makes it valuable. For example, Bitcoin users can encode data in the blockchain that will stand the test of time. The proof of work required to create blockchains and the hash rate used to secure the network makes it highly valuable. The immunity of the crypto makes Bitcoin more economically irrational to modify since they are buried more profoundly in the ledger. This means Bitcoin derives protection from the prohibitive cost of appending transactions.
The value of Bitcoin is a combination of luck and meritocracy. For example, individuals who have the intellectual resources needed to mine Bitcoin will also depend on luck to be in the right place and at the right time. The proof of work in Bitcoin makes it difficult to monopolize the network’s computer power that would give privilege to some people. In its actuality, Bitcoin works by requiring recipients to wait until the cost to reverse a transaction is higher than the value of the transaction. Though Bitcoin transactions happen in public, it keeps the names of buyers and sellers pseudonymous. This pseudonymity is meant to keep operations private and allow transactions without mass surveillance.
Scarcity and perception of value
Bitcoin is also backed by insufficiency and perception of value, similar to gold. Gold, for example, has maintained its intrinsic value because of both scarcity and being valuable outside of its use as money. The confidence that you cannot quickly inflate the stock of gold is the reason why it has remained valuable. In the same way, Bitcoin is backed by the perception of value due to being scarce. Something being hard to obtain due to scarcity makes it valuable. Bitcoin does not have value outside of its use as money because there is no other use besides its use as a medium of currency, but its scarcity makes it a valuable component.
Utility of value
Bitcoin is also backed by the utility where it exhibits all the properties of money. There is the utility to be used as money, which is indispensable for a functioning society with an economy. Economists believe money can be defined based on several core characteristics. Bitcoin as digital can be used to facilitate business transactions and can be stored as a measure of value. It his used as a store of value because users can invest and wait for its value to increase in an inflationary economy. Several corporations have been planning towards accepting the use of Bitcoin to pay for products and services. The currency in itself is a keystone binding the system together while creating economic incentives.
The Bitcoin currency can be converted to cash at a Bitcoin ATM or exchange and used to purchase merchandise pseudonymously. As the most valuable cryptocurrency, Bitcoin has been gaining ground into mainstream transactions. Several businesses around the world have started to accept the use of Bitcoin as a means of payment. About 36 percent of small-medium businesses in the United States have been shown to accept Bitcoin payment according to a 2020 survey. These include big corporate organizations such as Microsoft and Expedia. However, Amazon does not allow paying with Bitcoin yet.
Bitcoin has a reliable store of value, with its utility being the source of the crypto’s intrinsic value. This is because most asset’s fundamental value depends upon their service. The utility of Bitcoin and the subsequent store of value depended upon its use as a currency and medium of exchange. Cryptocurrency experts have argued that Bitcoin’s intrinsic value is based on the ability to store value.
The future of Bitcoin remains unknown, with speculations of either becoming the next big thing or bursting. Some governments have been weighing regulations on Bitcoin due to their concern about its lack of taxation and failure to control the currency. However, the value of Bitcoin has continued to rise.
The debate on whether Bitcoin is backed or not has continued among Bitcoin enthusiasts and skeptics. Several people have raised concerns over the intrinsic value of Bitcoin and where its backing comes from. When considering the traditional fiat currencies, then understanding Bitcoin’s inherent value can be somehow complex. The crypto does not have an outside physical backing, rather regulated by its determination to be scarce and valuable. This universal rule is crucial for Bitcoin to make it impossible to cheat using manipulations, as seen with modern financial systems. However, Bitcoin is backed by several factors, including scarcity, store of value, and security. Bitcoin is a form of digital gold that does not involve physical coin or bill. The supply of Bitcoin is mostly governed by a network of consensus mechanism that secures the cryptocurrency blockchain. The mechanism works by ensuring a limited availability of Bitcoin currencies and securing the network against frauds.