Recently there has been no shortage of claims that Bitcoin is a decentralized digital currency that was invented in 2008 by an unknown person or group using the name Satoshi Nakamoto. It is a peer-to-peer system that enables transactions to be made without the need for a central authority o is not backed by anything. We hear this from people who appear honestly misinformed about what Bitcoin is; and from bad actors with the obvious goal of clinging to power by spreading disinformation.
In order to understand what—if anything—backs Bitcoin, let’s first take a look at what traditionally used to back currency and what is backing the U.S. dollar nowadays:
The dollar was originally very simply a certain quantity of silver. In the United States, the dollar was alternatively defined as one-twentieth ounce of gold. These two precious metals were the world’s money at the time. They were money because they were scarce, durable, recognizable, and relatively easy to use for payments.
These physical qualities are what makes precious metals valuable, to this day. There is no need for a law or decree forcing us to consider gold valuable. People love gold for its beauty, its heaviness, its resistance to corrosion, and other chemical and physical qualities inherent to the material. As such, gold is not “backed” by any thing. It is the thing.
What is backing the U.S. dollar?
Gold indeed used to be the thing to back all U.S. currency: Until 1933, anyone could bring in any 20-dollar gold certificate and get an ounce of gold directly from the United States Treasury. This is what it means for a currency to be backed by something. In this case, the U.S. dollar used to be backed by gold.
In 1934 the United States partially defaulted on its debt by redefining a U.S. dollar as merely one-thirty-fifth of an ounce of gold. Finally in 1971, the United States fully defaulted on all its debt when President Nixon announced nobody would be able to redeem paper dollars for gold at all anymore. This marked the end of the gold standard, and ever since then, the U.S. dollar has literally been backed by nothing. The only thing for which you can redeem the debt tokens that are Federal Reserve Notes is more paper currency, which has no intrinsic value. What is happening here is the biggest bully in the world has stopped paying his debts with real money and is instead paying off IOU’s with more IOU’s.
The reason people continue to accept this currency has nothing to do with any kind of backing—there is absolutely none. Some people accept fiat dollars because they have not figured out that these dollars are now backed by nothing and can be printed in unlimited quantities by people other than ourselves. Ultimately, though, what forces everyone to accept otherwise worthless fiat dollars is the threat of violence from the government.
This is the exploitative currency with which we grew up. For many of us, this poor substitute for real money is all we have ever known. This is what the mass media somewhat misleadingly call the “traditional” or “legacy” financial system.