Bitcoin is backed by the blockchain ledger which records every transaction in history. The proof of these transactions, provided by the blockchain, means two anonymous parties don’t require trust to transact value.
Bitcoin is also limited in terms of supply. This is how Gold derives its value from its scarcity – This is a good characteristic of currency.
The blockchain ledger is also backed by one of the most important sources of energy and resources in the 20th century. We’ll explain what it is, and why this energy source is what makes the Bitcoin Protocol what it is today.
How Are Regular Currencies Backed?
Regular Currencies or Fiat is backed in a few ways. Fiat in America used to be backed by Gold but in 1971, President Nixon decided to leave the Gold Standard and the American dollar was no longer backed by anything.
But there are a few different schools of thought when it comes to the question of what backs Fiat.
The first school of thought is that Fiat is not backed by anything but belief and trust in the system. The system works because everyone believes $1 dollar equals $1 dollar and that the system won’t collapse.
The other school of thought is that Fiat currency is backed by the production of work from the nation. Or in other words, the GDP backs the fiat currency.
None of these camps are wrong or right but we’ll explore how bitcoin differs from regular currencies and why it’s so attractive recently in 2020.
What’s a Blockchain Ledger
Think of the Blockchain Ledger like a digital stone. And every time someone sends bitcoin over the protocol, that transaction is recorded on the digital stone – never to be removed for the entirety of history. Once something is on the ledger, it will be on there forever. All the data is known as ‘Immutable’ meaning it cannot be changed. No one can change it. Not the government, not your uncle, not you nor I can change it.
How is that possible? We won’t get into too much detail as it’s complicated but in a nutshell, it’s because to change anything on the Blockchain Ledger, you would essentially need to resolve complex math algorithms again to change it. And you’d be on your own trying to solve it faster than everyone else trying to mine bitcoin.
The bitcoin Blockchain Ledger is that kind of beast and it’s powered by the world’s most important resource today – computing power. To secure the Blockchain Ledger, we are using tons of energy – more energy than entire countries. So in a pure economic sense, the amount of money to produce the sort of computing power that secures and powers the entire blockchain ledger 24/7 is what backs bitcoin.
What Is Fiat?
Fiat currency refers to Government-issued national currencies such as US Dollar, Australian Dollar, Canadian Dollar etc…
All these currencies are not backed by anything which gives governments full control of the supply. Throughout history, all fiat currencies have been devalued to 0, due to excessive printing. Extreme examples are known as Hyperinflation where the value of each dollar crashes faster than you can see it coming.
Current infamous examples of Hyperinflation are Venezuela and Zimbabwe- Their currency literally goes down by more than 50 – 100% per year.
Imagine having $10,000 and now it’s worth $5000 just 1 year later. People are wheeling in barrows full of cash notes just to buy a loaf of bread. In Zimbabwe, hyperinflation got so bad that each note is one trillion dollars. It got so ridiculously large the government had to hard cut a few zeroes.
Now it’s easy to imagine this not happening in first world countries… but 2020 alone has proved otherwise. The US printed more in 2020 than two decades combined of printing. This is why bitcoin and other stores of value assets have been on the rise.
Bitcoin VS Fiat?
Let’s do a direct comparison of bitcoin and Fiat. What makes bitcoin special? One could argue the governments could just make their own cryptocurrency backed by the dollar and that would render bitcoin meaningless… right? Wrong!
As countries have been in talks about coming up with their own Central Bank Digital Currencies (CBDC’s), there is still a fundamental difference between CBDC’s and bitcoin.
The difference isn’t actually the digital and technical aspect of the coin, but it’s the monetary policies which make bitcoin so attractive. You see, bitcoin will only ever have 21 Million bitcoin that exists. And it will only go down due to people losing their bitcoin.
On the other hand, governments can continue printing CBDC’s or fiat whenever they want. Bitcoin is controlled by no one but maths. So no one can add more bitcoin if they wanted to.
This is the fundamental difference between bitcoin and fiat. Decentralized control vs Centralized control. Other properties are that bitcoin is a deflationary monetary policy whereas fiat is inflationary.
This would mean bitcoin would never hyperinflate and for the first time in history ever we have such a currency.
It is very interesting to discuss the differences between bitcoin and Fiat and really do a deep dive to examine what money is. Why do we use money? How does money work?
All these questions have not really been questioned seriously as we’ve never had a good solution to replace the monetary systems which humans have used for thousands of years.
But as cryptocurrency technology grows, it challenges the very idea of what money is and who should have control over money. Because he who controls the money has all the power.