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    Sumit Bera

    Is There A Real Backing For Bitcoin?

    Bitcoin backing
    The innovation of blockchain technology and the rapid growth of Bitcoin have raised an unprecedented excitement around cryptocurrencies. Many experts call cryptocurrencies the money of the future, but meanwhile, plenty of incriminating materials that claim that Bitcoin is nothing more than a soap bubble can be found. The main argument of skeptics is the lack of material backing. Is it so?

    What is Bitcoin – gold, securities, currency?

    It is easier to compare Bitcoin with the most popular assets: stocks of enterprises or banks, currencies of various countries, precious metals (gold, silver, platinum, etc.). There are official exchange rates published on public services – bank websites, the Forex market, and stock exchanges. The Bitcoin exchange rate stands along with the US dollar, yen, and euro. Formally, Bitcoin is rated just like real currencies: the price is set at the level offered by the seller for a certain number of coins at the time of trading.

    The official Bitcoin exchange rate and the cost of mining coins do not directly depend on each other. The same goes for valuable metals, stocks of enterprises, and national currencies. Thus, digital money is a full-fledged asset. You can invest in Bitcoin, make a profit from fluctuations in the rate of exchange, and purchase and resale transactions. It doesn’t matter if there is a tangible medium for them (recently the shares have also ceased to be transferred in paper form, they are being sold as an extract from the register of shareholders).

    Can Bitcoin be considered a financial pyramid?

    Skeptics usually compare cryptocurrency with the Ponzi pyramid. There is one similar criterion between them: money does not appear as a result of the production of goods or services, but appear “out of nowhere”. That’s how the questions “why Bitcoin costs exactly that much” and “what needs to be done to get coins” arise.

    Real money can be earned by selling products and providing services. Mining in the understanding of many investors seems to be an imitation of work because no efforts are made in the extraction of new coins (everything is done by the machine). Actually, the economic essence of digital money is similar to manufacturing.

    The miner faces the following costs:

    • One-time – purchase of powerful equipment (video card or ASIC-computer);
    • Permanent – payment for electricity consumed;
    • Variables – repair or replacement of equipment that has failed.

    The miners risk a lot when they have to purchase equipment from scratch. And only after the completion of the “production” cycle, when a new coin appears, the miners start to earn. It is difficult to understand for those owners of Bitcoins who got them through exchange operations where coins come from and what the calculation of the current value is based on.

    Bitcoin has established in the role of an asset worth investing. This confirms the regular appearance of its analogs – altcoins. The community is adapting bitcoin to the reality, and already partly integrated into e-commerce routine. 

    What is Bitcoin backed by now?

    Intangible assets gradually cease to alarm investors. After all, wire transfers between bank accounts have become an ordinary action. More and more purchases are made through websites. And the question above is supported by the most persistent skeptics only. They are not embarrassed by the fact that e.g. US dollars do not have reliable backing, apart from the rants about high GDP, debts, and high prevalence.

    The following is true for Bitcoin:

    • Cryptocurrency is fiat money that is not secured by a commensurate value of gold reserves;
    • Bitcoin is not connected to any country (otherwise the principle of decentralization will be violated);
    • Digital coins cannot be counterfeited, unlike “real” banknotes;
    • The total investment in existing coins is tens of millions of US dollars. This amount of funding allows you to maintain a system of exchange and trade without material backing.

    The only true value of Bitcoin is its market price. This can be called a disadvantage due to the unpredictability of the rate, and an advantage at the same time too. The latter is expressed in the absence of reference to the cost of production and the estimated value of assets. Deep down, BTC is supported by increased volatility, a high rate, which gives more opportunities for speculation and big earnings on a short-term basis.

    Other assets (gold, stocks/bills) allow making a profit on a long-term basis. Cryptocurrency gives a chance to rise in several days, which strengthens its position, attracts more and more investments in both mining and trading. Several countries have already recognized Bitcoin as a legitimate means of payment, so there is no turning back.