Bitcoin - What is it backed by?
The goal of this article is to examine the question, what is bitcoin backed by? To answer this question, let’s first look at what it means to be backed by something and then define the term bitcoin. To start, in order to understand what bitcoin is backed by, we need to examine the definition of bitcoin itself and define some key terms...
Defining Cryptocurrency
It’s essential to note that not all cryptocurrencies are cryptocurrencies in a strict sense. The same way you might think of dollars as a currency but would never refer to your balance in dollars as a currency position, there are now actually dozens of different kinds of currencies traded in financial markets.
It’s also important to understand that cryptocurrency simply refers to what we used to call digital money or an asset that serves as some kind of general store of value and medium of exchange (like money).
For example, gold has been used for thousands of years as both a currency and store-of-value asset. Today, investors can buy stocks like $GOLD which reflects ownership interests in gold bullion held on behalf of shareholders; however,
even if shares are worth 100% more than their underlying holdings tomorrow, they still represent ownership in real gold today. Why Gold Isn’t Money: While we could go into depth on why the cryptocurrency isn’t backed by anything else just yet (it's much newer than real money),
it's helpful to know that many successful cryptocurrencies like $GOLD were once backed directly by another commodity – whether physical goods like precious metals or other goods/commodities like corn – and exchanged one-for-one with cash at banks just like US dollars do today.
Digging into the Benefits of Cryptocurrency
In recent years, digital currencies like Bitcoin have exploded in popularity. Advocates tout them as a fast, cheap, and safe way to transfer money around the world—with far less risk than using more traditional payment methods. But how much do you really know about these cryptos? Take a look at what they are and what they’re worth
Understanding why you can't hold cryptocurrency in your hand
What gives money its value? This question has baffled economists for centuries because money used to be a physical object. Once paper money was invented, though, everything changed. Money became a digital record in your bank account that you could either spend or save.
And then came cryptocurrency like Bitcoin . . . One of Bitcoin's biggest selling points is how it cuts out third parties from transactions. Unlike with credit cards and cash transactions, there are no middlemen involved in cryptocurrency transactions.
Where are digital assets stored?
A bitcoin wallet is essentially an account that holds your public and private keys (which are essentially just long strings of numbers and letters), so storing bitcoins essentially means having access to your public and private keys.
These can be stored in a digital file on your computer or even written down on a piece of paper—as long as you have access to them, you have access to your bitcoins.
Creating Cryptocurrency Assets
Bitcoin and other cryptocurrencies are often created as a reward for payment processing work in which users offer their computing power to verify and record payments into a public ledger.
The rewards can be paid out in exchange for other currencies, products, and services. In addition to being mined, bitcoins can be obtained through exchanges or purchases directly from an issuer.
This may be a centralized exchange (like Coinbase) or decentralized marketplaces (like Bisq) depending on who you talk to.
The Future of Cryptocurrency
Let’s think about what backs money in today’s world. The U.S. dollar has full faith and credit of [the] government, while Great Britain uses a fiat currency or a currency that is as good as gold (yet another illusion since no currency can ever be as good as gold).
So with Bitcoin, what does back it? Nothing at all! It’s backed solely by the trust. And although many have speculated as to whether a cryptocurrency will succeed in becoming a global reserve currency, these same people fail to realize one very important fact: If something isn’t backed by anything,
then it must stand on its own merit...and such trust does not happen overnight. That being said, cryptocurrency has come a long way, but it still has some work ahead before convincing investors they’re better off going digital than putting their trust in paper or digital fiat currencies.
When Satoshi Nakamoto launched Bitcoin into cyberspace all those years ago, he was merely trying to spark an idea—one which many have begun to believe just might have legs...
but only time will tell for sure if blockchain technology proves capable of replacing today's monetary standards.
For now, though, there are other cryptocurrencies threatening to disrupt traditional finance; for example, Ripple is already gaining traction among banks looking for speedy ways to move cash around.
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