I think the next step will be some government issuing digital currency. It would have the “physical” characteristics of a bitcoin but it would be backed by an identifiable national economy.
I suspect that a replacement would immediately be subject to a speculator driven bubble, with each purchaser hoping to profit before the whole thing collapsed.
The US government doesn’t guarantee the value of a dollar. The USD changes in value all the time, occasionally for frivolous or political reasons. In fact, that’s the whole argument against national currencies and for bitcoin, because bitcoin can never be held hostage by the tea party (or it’s equivalent) the way a dollar can.
I understand your point, but what form does the US Government guarantee actually take - I guess there’s management of the currency going on, which isn’t happening with bitcoin, but I don’t think government guarantees are worth much if (as seems likely) they will evaporate if everything goes to shit.
The perception that the guarantee means something might be an important stability factor.
In the US, correct.
If you take out a loan in Bitcoin, you can repay the loan in dollars. You still have to have enough dollars to repay the loan, plus interest, based on the proper exchange rate. Or if the contract stipulates Bitcoin repayment, and you offer Bitcoin repayment, that must also be accepted. The lender can’t suddenly demand dollars, but the borrower can repay in dollars even if the contract is written in Bitcoin terms.
Bitcoin is backed by the reputation of pure mathematics.
It’s the encryption algorithms that people are relying on. This is exactly the same principle that backs our knowledge of the length of the hypotenuse of a right triangle, given the lengths of the other two legs. It’s the same reason we know that x=4, given that x+3=7. It’s even the same backing that engineers use to build bridges. The mathematical security of the encryption algorithms, given current computer speeds, is what protects the value of Bitcoin. If new faster computing methods are discovered, Bitcoin will no longer have that backing and its price will plummet, for the same reason that if someone attacks one of the supports of a bridge, no one will trust the bridge to support the same weight.
I should add that this isn’t really an issue that comes up anymore in developed countries.
Legal tender laws are most relevant immediately after a country has devalued its currency. The old law says the dollar is worth such-and-such amount of silver or gold, but the new law says the dollar is defined by not quite as much of the shiny. Legal tender law: you must accept dollars for payment of debts at their new legal valuation, not the old. You must accept the new dollars as if they were equivalent to the old. Such laws just don’t mean much anything anymore in a places like the US or Japan or Europe etc., because the money is fiat from the beginning. No convertibility. There is simply no need to “devalue” against a precious metal and then enforce the new money as equivalent to the old. If the government wants more cash, they’ll just type up more cash in the computer. (Smaller countries that peg their currency to other countries’ currencies might still have some use for a legal tender law if they devalue against those other currencies. It would work exactly like devaluing against gold.)
What genuinely supports use of the dollar is not at all legal tender laws, but rather 1) banking regulations that mandate that banks keep their books in dollars. Most “money” that we use isn’t even created by the government, it’s created and maintained by private banks. Those banks must keep their accounting ledgers in dollars in the US, and so we use dollars whenever we use major banking services. And 2) the government takes tax payments in dollars and nothing else. Even if the banking system were deregulated, and private banks could accept deposits of gold, silver, etc. and print their own banknotes, people in the US would still have a constant demand for fiat dollars to meet our tax obligations unless the government changed its tax policy.
It’s fully possibly even now to do business entirely in small flecks of gold or silver passed around, and then transfer to the USD whenever tax payments are due. But that’s a bit silly. Might as well transact business in USD like everyone else – a key reason it’s valuable is that everyone else uses it – and then you can pay your taxes in the same currency that you transact business and keep your books in, with no need to constantly recalculate the legally correct exchange rate for tax purposes.
Well, according to China Uncensored (warning, YouTube video), China is the future of Bitcoin at least. here is the article the video is based on.
If anyone wants to watch yet another video, here is SciShow’s video on how Bitcoin and cryptocurrencies work.
It’s been a while since I read the paper by “Satoshi Nakamoto”, but I do not recall any mention of RSA. It definitely used elliptic-curve based digital signatures, and those are even more vulnerable than RSA to quantum computers.
This is not true in any real sense. The math give you the confidence that the transactions cannot be easily corrupted. However with the bit coin mining pools consolidating it gets harder to say that you won’t get over half the miners (transaction verifiers) controlled by one entity.
Bitcoin is backed by people confidence that they will be able to use bit coins to buy things they want. If people no longer feel that this will be true all the math in the world will not help. There are other crypto currencies that have just as good math behind them but they are not used at all.
We already have digital currency. The vast majority of my spending by value is done digitally and it was even before the rise of the internet. My mortgage was always paid by automatic withdrawal. My most recent house purchase didn’t even have one physical check involved at all. more than 99.9% of my money exists digitally and has since my first job.
The thing bitcoin and the like were supposed to do was eliminate the need for banks to be involved in the transaction. But one of the first things to come up once bit coin got going were bank like things like MtGox. So they didn’t even free us from the tyranny of rapacious bankers.
I don’t believe this is correct. Sure, the mathematics ensures that Bitcoins can’t be “forged”, and you can be sure that if you pay a Bitcoin or get paid a Bitcoin, it’s an actual Bitcoin. And the mathematics ensures that Bitcoins can’t be created by fiat, and there’s only a limited supply of them.
That doesn’t mean that actual Bitcoin has any value.
The real answer is that the value of Bitcoin is backed by the community of people who will accept Bitcoins as payment. If those people do that, then a Bitcoin has value. If they don’t, then the Bitcoin has no value.
See, I could implement a cryptocurrency tomorrow, LemurCoin. And it could have exactly the same properties as Bitcoin. But nobody would accept LemurCoins as payment for any goods or services. What is the difference between them? The only difference is that some people will accept Bitcoins which means other people will accept them which means other people will accept them. But nobody will accept LemurCoins, which means nobody will accept them, which means nobody will accept them. And in fact lots of people really have done this and there are dozens or maybe hundreds of Bitcoin knockoffs, and none of them are worth anything.
Bitcoins don’t even have the property of a key good that can be used as money, because there’s literally no value to a Bitcoin except it’s exchange value. Of course this is exactly the same position as the US dollar and the Euro. But those currencies have a key difference between LemurCoin and Bitcoin, in that they’re backed by serious governments, whereas Bitcoin is backed by a small group of enthusiasts/speculators, and LemurCoin is backed only by me.
It seems to me that cryptocurrencies might have a future as unforgeable tokens for real goods and services. That is, a company might issue electronic tokens exchangable for a coffee drink, and you could be sure that the token was genuine by the above mathematics, and that coffee drink token could be exchanged for other goods and services as if it were a currency, as a key good. Same thing with game currencies, like gold in World of Warcraft. Lots of internet scammers want to be paid in iTunes gift cards. But there you’re trusting that the company that issued the tokens will honor the tokens when the time comes. The fact that you can mathematically prove that you have a unique coffee token doesn’t mean a thing when the company can just say that the promotion ended on Tuesday.
The guarantee is that it would really screw up the American government if it did something stupid with the value of a dollar.
Yes, the dollar fluctuates in value. But not unreasonably so. (The fluctuation rate of the bitcoin is more than ten times higher than the dollar’s) And the dollar has a record of holding its value for over a hundred and fifty years. That means people can accept dollars in the reasonable belief that they will still be valuable in ten years. Can you say that you’re certain bitcoins will still exist and have value in 2027?
That is absolute nonsense.
If bitcoins collapse in value, what am I supposed to do? File a lawsuit against pure mathematics? Put a lien on its assets? March outside the mathematics embassy and call for a boycott of mathematical goods? Threaten to break mathematic’s knees?
Everyone knows that. And no, the only way you’re going to bust someone solely based on bitcoin transactions is you need to
- Seize the records of at least two endpoints
- These endpoints need to have not scrubbed their records. The endpoints need to have the real contact information of a bitcoin buyer or seller.
- Out of traceable (non laundered) transactions, did any of them go through the endpoints you have the records for?
- Do you have other evidence as to the nature of a specific transaction?
None of this is easy to do. And the silk road laundered it’s transactions, and I would assume that whatever dark market is occupying the niche the silk road was in does the same thing. The laundering screws investigations - someone would have to seize the records of the dark market, AND both endpoints in order to nail an individual illegal goods merchant. While obviously 2 dark markets have been brought down, it isn’t easy to do, and requires the criminals running the markets to make mistakes.
What it comes down to is that at the present time, most illegal transactions conducted using bitcoin, the people doing them are getting away with it. Probably fewer people are busted who used bitcoins than who used cash and drove their car to transport the illegal goods. I think bitcoin will go down, eventually, because it really doesn’t have a legitimate purpose. I would suspect that 90-99% of all transactions using it are some type of crime these days. So, eventually the authorities will require anyone buying or selling bitcoins for USD keep detailed customer records, or they may just ban it outright.
Seizing endpoint records is difficult in the underworld. But the underworld economy has to interact with the legitimate economy, or it’s worthless. And getting records from legitimate companies is easy, for the police (at most requiring a subpoena, and sometimes not even that).
Don’t you think it’s a little unfair to compare bitcoin to the most stable national currency in the history of the world, instead of the typical or “average” national currency? It’s like trying to compare the Best Picture of 1960 to whatever movie happens to come out first in 2018. Of course the historical best example of one is going to beat the first ever attempt of the other.
Except it’s not even doing that, by some measurements. The US dollar is in a particularly notable period of historic stability, with historically low inflation and even a tiny bit of deflation from one month to another, in the past 10 years or so. Historically, even this paradigm example of a perfect national currency has varied and fluctuated wildly. Here is an interesting site where you can see the wild inflation/deflation rate in the USA going all the way back before the revolution.
Crypto currency is not guaranteed by any particular power or might of arms. It’s guaranteed only by the strength of its design. If bitcoin or any other crypto currency continues to be provably impossible to counterfeit, immune to political whim, and otherwise impossible to manipulate through deliberate inflation or otherwise, and people became actually convinced of all of the above, there’s no reason why America’s guarantee on the dollar would make the dollar more desirable. After all, the only thing America is guaranteeing is exactly these same things, but just not as good.
I’m pretty sure it is.
But that’s just another mathematical property of the algorithm. A known mathematical property, just as it’s known that the encryption is important.
Just as with transaction encryption security, which could potentially be exploited with some unexpected leap in computing power, 50% transaction verifiers is another potential exploit. But that’s just another way of saying, the other side of the coin, that the extreme apparent difficulties in breaching that barrier is yet another mathematical wall inside the code against tampering that allows the system work, at least for the time being. 50% is quite large number. That’s not a guarantee of continued success (nor is the encryption) but it does happen to be another piece of mathematical logic backing the security of the system while simultaneously allowing it to function, and in which users obviously do have at least some small degree of confidence. It’s not like government-backed currencies are guaranteed either, but nevertheless it’s reasonable to have confidence in them because of the nature of their use and history and backing.
This is absolutely true, but not related to what I was trying to say.
More on this immediately below.
It’s not a comprehensive answer for why Bitcoin has value. But the question I was responding to, specifically, is what “backs” Bitcoin’s value.
I wasn’t giving a sufficient condition for Bitcoin’s value that would explain, sufficiently unto itself, why people value ownership of these particular electronic digits on computers. I was giving a necessary condition, and moreover, what I believe to be the single most notable and obvious necessary condition. It is necessary that people have some confidence in the mathematical underpinnings of the system. Clearly that is an absolute requirement. (That’s what a necessary condition is, after all.) If confidence in the mathematical security did not exist, no one would value Bitcoin. The value would collapse. If any exploits became generally known – either through a new insight into the mathematics or even after-the-fact in the aftermath of mass theft – that would also collapse the value of the currency.
That seems quite clearly, at least to me, what “backing” a currency is all about. A necessary condition, without which it would fail. It’s not a list of each and every reason why it has value, including sufficient conditions. You’re giving a demand-based argument for Bitcoin’s value, and that argument (which is also gazpacho’s point) is completely and totally correct. But even that demand-based argument is built on top of the necessary condition I already listed.
Nobody would buy either Lemurcoin OR Bitcoin without some measure of confidence in the mathematical underpinnings of the system. Obviously Bitcoin has other things going for it, too, most notably that it was first. But I would again argue that it wouldn’t have been “first” at all without fulfilling that necessary condition: confidence in the mathematical underpinnings of the algorithm. It is trust in that mathematics that is the bedrock necessary condition on which everything else is built. In my opinion, anyway.
This gets us into the more semantic territory of what it means for a currency to be “backed”. What do we mean when a currency is backed by gold? It means that the institution issuing the currency has made a promise to convert the paper into gold on demand. Fiat currencies don’t have that. So what “backs” a fiat currency?
We’re already getting more metaphorical here if we’re not talking about direct convertibility. But it seems fair to say that the underlying stability and trustworthiness of the institution that issued the currency provides the (now metaphorical) “backing” for that currency.
In my own experience, this is how we normally talk about fiat currencies. What are they backed by? We generally say the trustworthiness of their governments. Not the demand for the currency among the public. Naturally, that demand is also necessary for the currency to have value, but when we talk about what “backs” fiat currency, we’re always talking about the stability of the institution that issued it. Maybe I’m wrong about how people speak about fiat currency backing. If there are any exceptions to that in the popular press, I’d be happy to see them. But I’d personally be inclined to say that what backs the US dollar is the stability of the US government, and I don’t think I’m the only one in this thread saying similar things.
So what is the relevant parallel institution, in the case of Bitcoin? The relevant institution here is the human mathematical discoveries which were used to provide some security to the transactions, just as government control over central bank computers and printing presses is the institution that secures fiat currency.
That security isn’t sufficient by itself to give Bitcoin value. But it’s also not sufficient to give any real-world currencies value either. It is, however, necessary for that security to exist for there to be any demand in the first place.
Obviously I wouldn’t say that there is anything “factually” wrong with saying that Bitcoin is backed by the demand that people have for it. That just seems, in my own experience, contrary to how we generally use the term backing when referring to fiat currencies. Maybe I’m wrong about that, but I don’t think so right now.
Nooooooope.
What does this have to do with anything?
Currencies that have been backed by governments have collapsed in value many, many, many times in the past. What would you do in those cases? What would you do if you were living in Weimar Germany in the early 1920s and had to crate around a wheelbarrow to carry millions of marks around? You could file a suit against the government just as easily as you could file a suit against mathematics. It would have been totally irrelevant. Your money would still be worthless. You could march outside the Reichsbank just as easily as you could march outside a major Bitcoin mining server. It would have been totally irrelevant. Your money would still be worthless. You could threaten to break a banker’s knees just as easily as you could threaten to break a local computer scientist’s knees. It would have been totally irrelevant. Your money would still be worthless. You’re stuck with the wheelbarrows of cash in every one of those cases. Put a lien on the chancellor’s house? Pffft.
If your own peculiar definition of what it means for a currency to have backing is “I know exactly what buildings I could throw molotov cocktails into if the currency lost all its value”, then no, Bitcoin isn’t backed.
But that’s an absurd definition.
I don’t quite agree with gazpacho’s or Lemur866’s argument that demand is what is backing the currency. Seems to me contrary to how we generally speak about fiat currencies. But at least their arguments actually make sense.
You completely miss my point. Sure bitcoin can go south, and in my view it’s far more likely that bitcoin will go south than most traditionally stable national currencies. The point is, the difference is or is largely quantitative. Everything can go south.
The only proposition that I disagree with is the proposition that traditional currencies have, in the real world, some sort of bedrock value that cryptocurrencies do not. People are very quick to point out that cryptocurrencies are castles built on thin air, but in my view we are all living in castles built on (at best) somewhat solidified air.
Sure, the US Dollar has had some periods where its value has fluctuated greatly. But can you find any period in the dollar’s history, and any period of the same length in bitcoin’s history, where the dollar has fluctuated more than bitcoin?
Citation needed. From what I know, most of the endpoints are grey market and there is no legal requirement for them to keep records. So at the present time, bitcoin is mostly anonymous. It is not in fact easy for the police at the moment.