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I like bitcoin in the sense that it decentralizes currency. I would like to know though if it is a commodity-backed currency similar to the gold standard decades ago? Is it possible in the near future? As it is it seems that it is the same fiat money, except that it isn't the Fed issuing it. Is that correct to say? Thank you!

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4 Answers 4

A true "gold standard" means that a unit of currency (e.g., "dollar") has a certain amount of commodity backing it (gold, in the "gold standard" instance), and that the currency can be exchanged for that commodity at the designated exchange rate.

The amount of gold per dollar is fixed under a gold standard, so a dollar on one day gets the exact same amount of gold as does a dollar the next day.

The U.S. went off the gold standard (currency "backed" by gold) in 1933. After WWII it allowed central banks to exchange dollars for gold at a set rate ($35 per ounce of gold) however that ended in 1971.

But iust like gold doesn't have any "backing", there is no backing for Bitcoin.

There could be a paper currency (or electronic transaction) that has bitcoins as the backing. Essentially that is what every hosted (shared) EWallet provider offers -- an account through their service which presumably every BTC deposited is still available for withdrawal (e.g., they haven't spent it, invested it, loaned it out, or lost it).

Redeemable codes would be an example of an electronic currency that is has backing where each BTC issued is 100% backed (with a BTC held). There's no way to audit that to guarantee that they have full backing though.

So just like gold doesn't have any "backing", it makes no sense to have backing for Bitcoin. Bitcoins themselves have value, due to their scarcity and other reasons.

If you are looking for a guaranteed value in case the bitcoin exchange rate drops then there are PUT options that you can buy. That's an investment product though and not a part of the currency itself.

[Update: If you want a gold-backed electronic currency, Peter Schiff's Euro Pacific Bank Ltd (not available to those in the U.S.) essentially offers that.]

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Maybe, but there are a lot of problems with the fusion of 'decentralized' and 'commodity-backed'

Double spending

Bitcoin prevents double spending by a proof-of-work function. If bitcoins were minted by putting in gold, then miners don't have a financial incentive to complete these proofs-of-work, so you need a new way to prevent double spending.

Trust

I say that I have 20 bars of gold. How do you know if my claim is valid?

Cashing out

I send 10 bitcoins to a merchant, who wants to convert it into gold. How does he get the gold?

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It's not backed by any physical commodity like "gold", but according to http://en.wikipedia.org/wiki/Commodity a commodity is the generic term for any marketable item produced to satisfy wants or needs. And if people want to use it for trading there is a need for it and it has value.

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A gold backed equivalent of bitcoin would have to be run by someone like the Perth Mint with some sort of guarantee that the supply of digital coins in circulation reflected what they held in their vaults.

This would require an element of trust, or proof that the institution wasn't issuing more coins that it had.

In terms of incentives, the institution issuing the digital coins would probably want to charge a fee for each transfer or purchase to make it worth their while.

Would they do it? Probably not as Governments would probably shut them down for creating a competing currency.

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