The rise of potential new currency options is fascinating, and Bitcoins are an interesting speculation. But Bitcoins are ultimately backed by nothing.
You’ve probably heard goldbugs say the same thing about the U.S. dollar and other fiat currencies – that they are backed by nothing. That’s technically not true. Central banks, including ours, do still hold gold reserves – though how much of that gold actually remains is a subject of debate. What is technically true is that fiat currencies aren’t redeemable in anything and haven’t been since President Richard Nixon suspended gold convertibility in 1971.
Yet even if the Federal Reserve and U.S. Treasury dumped all their gold reserves onto the market, the dollar would still be “backed.” It would be backed by IRS agents, U.S. marshals, and the Army and Navy! The government can compel individuals and businesses to remit taxes in U.S. dollars. What the government can’t do is escape universal laws of economics – namely, that the more dollars they create, the less each one is worth.
Relative scarcity and brute force are what give the dollar value. The government may call it public “confidence” in the currency, but it’s really government compulsion at root.
Bitcoins are scarce, but there is no reason why anyone needs to transact in Bitcoins. And since Bitcoins aren’t redeemable in anything, their intrinsic value is zero. Any quoted value above zero is pure speculation.
Gold, on the other hand, can’t go to zero because it has intrinsic, eternal value. It is impossible to conceive of a society that wouldn’t value gold for its beauty, its unique metallic properties, or its long history as a store of value.