Bitcoin Myths, Part 10
“Backed By” Died With the Gold Standard
One of my favorite movies is The Princess Bride,1 and I love it when Vizzini says, “Inconceivable!” It makes me smile every time. There’s just something about the way he says it with complete and total conviction. But the moment that truly makes me laugh is when Inigo Montoya responds, “You keep using that word. I do not think it means what you think it means.” That line gets me every time.
But one reason that scene has always stuck with me is because there are a lot of words and phrases people throw around that don’t mean what they think they mean. One of the most common examples I hear when people talk about Bitcoin is: “Bitcoin is backed by nothing.” But what does “backed by” even mean?
A Brief History of “Backed By”
Before 1933, all U.S. dollars were “backed by” gold. 2 What that meant was that if you had dollar bills, you could walk up to a “gold window” and legally exchange those dollars for gold at a fixed rate. From 1834 to 1933, the official rate was $20.67 for one ounce of gold. 3 You could go to your local bank, the U.S. Treasury, or even the Federal Reserve, and they were legally obligated to exchange your dollars for gold at that price.
But things changed during the Great Depression. In 1933, Franklin D. Roosevelt effectively ended gold redemption for ordinary Americans through Executive Order 6102. 4 Americans were forced to sell their gold to the U.S. government at $20.67 an ounce, and shortly afterward the government raised the official gold price to $35 an ounce.
After that, ordinary Americans could no longer exchange dollars for gold at a fixed legal rate. Gold could still be bought and sold on the open market, but the old system of guaranteed redemption was gone. Only foreign governments retained the ability to exchange dollars for gold with the U.S. government until Richard Nixon ended the Bretton Woods system in 1971. 5
“Backed by” has been dead for a long time.
Inconceivable!
So if the dollar isn’t “backed by” gold, how is it valued? It’s inconceivable to many people that a currency could exist without being attached to some deeper base asset. But the dollar’s value no longer comes from gold. Its value comes from its utility, the strength of the U.S. economy, and the fact that taxes must be paid in dollars.
And truth be told, most things have always been valued based on their utility and the laws of supply and demand. The idea that money must be redeemable for a base asset like gold was only dominant for a relatively small part of human history.
Bitcoin is no different in this regard. Its value comes from supply and demand and from the usefulness it provides, such as censorship resistance and the ability to transfer value without relying on a central authority. It does not require the U.S. dollar, gold, or anything else to “back it up” (although it should be noted that fiat currencies relied on this system for centuries). Just like dollars, land, art, gold, and countless other assets, Bitcoin does not need to be redeemable for another asset in order to have value.
Conclusion
Next time you hear someone say, “Bitcoin is backed by nothing,” just remember that they are using a monetary paradigm that hasn’t existed since your dad (or grandpa) wore a leisure suit. “Backed by” simply doesn’t mean what many Bitcoin critics think it means.
Final Word
“Backed by” just doesn’t mean what it used to mean.
"Life is pain, Highness. Anyone who says differently is selling something." — Westley
Bitcoin Myths Book
Bitcoin Myths is an ongoing series answering the most common misconceptions and objections about Bitcoin, covering the environment, finance, crime, value, and many other arguments used against it.
When the series is complete, the full Bitcoin Myths book will be available exclusively to paid subscribers of Crypto Confidence.
Disclaimer:
The information in this publication is for educational purposes only and does not constitute financial, investment, or legal advice. Always do your own research before making any financial decisions. Cryptocurrency investments carry risk, and past performance is not indicative of future results. I actively invest and trade in the crypto markets, and my personal portfolio and holdings change frequently. Nothing I share should be interpreted as a guarantee of performance or a recommendation to buy or sell any asset.
https://www.imdb.com/title/tt0093779/
https://www.investopedia.com/ask/answers/09/gold-standard.asp
https://www.federalreservehistory.org/essays/roosevelts-gold-program
https://www.presidency.ucsb.edu/documents/executive-order-6102-forbidding-the-hoarding-gold-coin-gold-bullion-and-gold-certificates
https://history.state.gov/milestones/1969-1976/nixon-shock