Whenever you hear, “That currency is not backed by anything!,” it’s almost always meant as criticism. Hard-money enthusiasts are quick to point out the horrible track record of fiat currency. Nearly without fail, currencies “backed by nothing” get heavily devalued through inflation, and they often collapse within decades.
The best solution, so far, has been to tie currency to a commodity whose supply can not be arbitrarily inflated by governments or central banks, or to use that commodity directly as a currency. Gold and silver have served this purpose best, and they have been used successfully for millennia. Backing any currency in precious metals restrains the possibility for inflation.
But, when we look deeper, the connection between being “unbacked” and being at risk for inflation is not a necessary connection. It’s a reasonable connection to make, especially given the history of fiat currency, but it’s conceivable to think of a currency which is inflation-proof and not backed by anything. It might sound fanciful, but thanks to Satoshi Nakamoto, it’s not just possible – it currently exists, and it’s called “Bitcoin.”
Bitcoin is not backed by anything; you can’t “redeem” your Bitcoin for gold at a bank. And it’s not even “backed” by declaration of law. To hard-money folks like myself, that sounds like a recipe for inflationary disaster. But, as implausible as it sounds, Bitcoin is not susceptible to arbitrary inflation. It was intentionally designed this way.
Inflation ultimately happens for one reason: central control over the power to create new money – whether it’s a government trying to pay its debts, or a central bank trying to ease monetary policy. This is one reason why Bitcoin avoids arbitrary inflation: its supply is not controlled by any central authority. The supply is regulated by software and mathematics, not politics. Power in the Bitcoin world is decentralized over an enormous network of computers.
In fact, the software is so precise, we can predict a hundred years into the future almost exactly how many bitcoin will be in existence. You can’t say that about any other currency which is “not backed by anything.”
But it’s not only the production of Bitcoin which is decentralized; it’s also their record of ownership. Every single Bitcoin which has ever been created can be traced back to its inception – including every transaction and change of ownership. This ledger, called “the blockchain,” is publicly viewable, and it is practically set in stone. The ledger is not stored on a central server; it’s not controlled by a few gatekeepers. It is stored on every single computer serving as a node around the entire globe. I’d suggest there’s nothing else you can own which comes with such a clear proof of ownership.
All put together, this means you can’t forge Bitcoin records; you can’t fake ownership; and you can’t create new Bitcoin out of thin air. And it’s all possible through complex mathematics – no trust in a third party, government or corporation is required. In a sense, if Bitcoin is backed by anything, it’s backed by the strength of clever mathematics.
Bitcoin might represent the first currency which is not backed by a physical good and still prevents arbitrary inflation. It has expanded the limits on our traditional conception of money. So, next time you hear “Bitcoin is not backed by anything!” understand it as a deep compliment to the ingenuity of Satoshi Nakamoto.
October 21, 2014 at 02:53PM
