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Why Bitcoin Is Better Off without a “Gold Standard”

By: Franco Daniel Amati - @franamati - Mar 16, 2015, 12:13 pm

EspañolPaper money once used to be backed up by a physical good. It was convertible for a fixed quantity of a good, usually precious metals like gold or silver, through a bank, currency exchange, or a similar institution.

For example, the participants in the Bretton Woods agreements of 1944 laid down that each ounce of gold would support some US$35. This fixed conversion rate began to collapse in the 1960s, and ended up disappearing during the Vietnam war, when President Richard Nixon publicly announced in 1971 that the dollar would no longer be backed up by gold.

So we come to the present day, where the majority of national currencies are fiduciary: they depend on our trust, and not a predefined convertibility to something else.

Many have described bitcoin in the same way, given that — just like the US dollar — it has no “backing” other than our faith in it. Others also might say that gold is different, given that it has an “intrinsic” value — a worth independent of exterior factors — due to its industrial or decorative value (for example, for ornamental use or jewellery).

What’s certain is that since the end of the 19th century, thanks to the simultaneous discoveries of William Stanley Jevons, Léon Walras, and Carl Menger, we know that value is subjective, and that it also depends on our perception of whether an object, tangible or not, will help us achieve our ends. What’s more, this perception changes in time and space.

Gold may be very valuable, but if we find ourselves dying of thirst in the desert, we’d value a glass of water more than all the gold in the world. The same idea is expressed in the famous line by William Shakespeare’s Richard III: “A horse, a horse, my kingdom for a horse!”

The value of a good therefore depends on its scarcity, but also its utility: be it a bicycle transport, the philatelist’s pleasure in licking a postal stamp, or the gambler placing a bet on the roulette wheel.

And the “intrinsic” value? As the British politician and academic Enoch Powell said: “If people value something, it has value; if people do not value some­thing, it does not have value; and there is no intrinsic about it.”

Bitcoin and Use-Generated Value

The fiduciary state currency, in money or coins, has the utility needed to pay taxes. Moreover, in many countries it’s also made mandatory (not accepting it results in fines or being locked up), so its utility, demand, and value are in no doubt.

At the same time, precious metals also have uses that we’ve already mentioned that generate demand and a corresponding worth.

So, what’s going on with bitcoin? Perhaps we’re not as accustomed to its uses as we are with gold. However, to simplify things with an example, we can infer that if we need to transfer value from one place in the world to another, and if doing so via the bitcoin network is far more economical than doing so via a remittances company, simple economic convenience generates a demand for this kind of technology, which translates to economic worth.

This is no assumption: except for during the fist 10 months of 2009, bitcoin has always had a market value which represents and quantifies this worth.

Physical Backing and Centralization

Lacking a physical fallback in the form of an already existing material is usually seen as a disadvantage when it comes to analyzing bitcoin as a currency. It’s understandable: it’s easier to tie value to something that already exists than to to posit an alternative whose price we can’t predict. However, the absence of a physical support is what permits the greater part of bitcoin’s qualities and uses, in particular, those which derive from its naturally decentralized nature.

Let’s imagine a digital currency that had a backup like gold. Each unit of this currency would have to have a counterpart in gold stored somewhere in the world. And we should be able to change this digital currency for the corresponding amount of gold if we wanted to.

The problems with this proposal for a digital currency would be multiple. It would necessarily imply centralization, given that a safe place would have to exist where we could rely on the gold not being stolen; that would implement sufficient security measures to avoid robbery by third parties; that wouldn’t function as a fractional-reserve banking system; that the gold would be of proven quality, etc.

That’s not all. Looking to history, we’d also have to trust the government in whose jurisdiction the vault was located. And, in the end, we’d have to trust that the organization guarding the gold wouldn’t be accused of money laundering or financing terrorism simply because some of the users of the digital currency have committed these illicit acts.

Bitcoin, by contrast, solves the the inconveniences inherent to trusting the middlemen that traditional currencies require, although it also comes with its own problems resulting from technologies and an infrastructure that still have plenty of room for improvement.

When it comes to analyzing bitcoin and its lack of “backing,” developers may actually mean it when they say, “It’s not a bug, it’s a feature.”

Translated by Laurie Blair. Edited by Guillermo Jimenez.

Franco Daniel Amati Franco Daniel Amati

Based in Buenos Aires, Franco Amati is an IT consultant who specializes in digital currencies, blockchain solutions, and cryptography as means for greater decentralization, individual freedom, and privacy. He's the co-founder of Bitcoin Argentina and Espacio Bitcoin. Follow @franamati.

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