What is the backing of Bitcoin? What determines the value of BTC?

It is impossible to imagine a world where fiat currencies have no backing. Now consider that cryptocurrencies are unbacked, so it makes sense to ask, “Not at all What is Bitcoin backing?» If you are one of those people, then definitely read this article.

In answer to this question, we must say that Bitcoin does not have the support we expect. In fact, Bitcoin is different from all the traditional currencies that we know, and this issue multiplies its appeal. First of all, we have to take a look at the events in the world of money.

What is the backing of money?

Until before history August 15, 1971 Most of the world's currencies have Gold backing And silver They were. Before the advent of paper money, coins were made of precious metals and their popularity was high among the public. Later and during the agreement Bretton Woods That After the World War The second was signed, it was decided to gold To be used as the main support of currencies.

Read more: Bretton Woods; Everything you need to know about this agreement

System Bretton Woods with a purpose Reducing the volatility of different currencies that in 20s and 30s It was observed, it has been created. During this period, exchange rates were constantly changing and it was not possible to control them; As a result of these changes, currency instability occurred at the global level, and in the end, it fueled the great recession that happened during this period.

The end of Bretton Woods and the rise of fiat currencies

The Bretton Woods system was effective in the years after World War II and brought stability to the global currency market. However, in the late sixties, fundamental problems in the structure of this system began to appear. One of these problems was the excessive strength of the US dollar, which interfered with world trade. For this and other reasons, governments decided to abandon the Burton system and use the fiat currency system instead.

Actually one unbacked currency (fiat)is a variable valuable currency that It is not backed by any goods. Previously, the dollar or other currencies were backed by a similar volume of gold or any other commodity. In practice, the exchange of dollars for gold was severely limited, but still dollars had a value equivalent to the same amount of gold, at least hypothetically.

Read more: What is fiat currency?

Today, the dollar is no longer pegged to gold. Of course, you can buy gold with your dollars, but the value of gold and dollars are completely independent of each other. In addition, different currencies do not have a fixed rate relative to each other and their value changes freely. The exchange rate will also be different depending on the type of currency. A few years ago, one euro was worth 1.4 US dollars.

What is Bitcoin backing?

Bitcoin (BTC) A support from nothing a commodity does not have and in fact with nothing Backing up can't; Why so Decentralized and no entity or organization or person controls Bitcoin. Bitcoin is an unbacked currency and its price the cycles Supply and Demand Set.

Read more: What is Bitcoin (BTC)?

Bitcoin being unbacked does not mean it has no value. In fact, as we said, the world's famous currencies do not have a backing, and that is why they are called fiat currencies. For a better comparison, note that Bitcoin is not issued by a central entity and one of the reasons Valuable Being being rare And being limited It is. In fact, the more people buy Bitcoin, the more its value will increase.

Is fiat considered a fiat currency?

Yes; Just like the euro and the dollar, Bitcoin And other digital currencies too Unbacked currencies are considered Because their value can change freely and their price is determined by the market. As far as you can even tell, it's the consumers of digital currency whose price is determined by the concept of “Consensus” Define.

• Unlike traditional unbacked currencies, there are fundamental factors related to the value of Bitcoin that make it reliable. First of all, Bitcoin is mined by computers, which require time, money and investment. Thus, the more expensive the Bitcoin mining process becomes, the more likely the price of this currency will slowly rise.
• Second, in relation to traditional currencies, governments can increase their currency reserves as much as they want whenever they want. However, it is impossible to do such a thing in Bitcoin. Because the amount of bitcoin supply is fully determined and the number of bitcoins entering the market will gradually decrease. Bitcoin cannot become a government tool, and no official or government cares about it. Because Bitcoin is an independent and free currency.

Is it important to support Bitcoin and other currencies?

After the abandonment of the Bretton Woods agreement, the idea of ​​backing currencies with commodities was deemed ineffective. Instead, political perception and economic policies were raised as basic ideas. According to these ideas, money is valuable because we believe it is valuable. And this is the truth behind the dollar, euro, pound and of course bitcoin.

Many people refer to Bitcoin as an investment tool rather than an actual currency. One of the main reasons for such thinking can be seen in the extreme fluctuations in the price of Bitcoin. Meanwhile, the value of a traditional currency can suffer many ups and downs.

In some cases, extreme inflations may cause a currency to be worth close to zero. Zimbabwe is an example of these countries. In recent years, with a huge increase in inflation in this country, the government has started printing bills worth one hundred billion dollars. This inflation went to the point where the price of one US dollar was equal to 35 trillion Zimbabwean dollars. Also in April, the International Monetary Fund announced that Venezuela is struggling with inflation of 500 percent this year, and this figure will reach 1,800 percent next year. In this way, we will soon witness the loss of all the value of the Venezuelan currency.

Read more: Best Bitcoin (BTC) Wallets

As you have seen, mismanagement and excessive printing of banknotes by the government can cause unprecedented inflation. Therefore, Bitcoin intends to become a currency that no government can control. It is the people who mine their money. They can spend their mined money in a completely free market. In addition, since the currency is self-sufficient and its number will not exceed a certain amount, therefore it cannot be the focus of political negotiations. So it is quite true to say that Bitcoin is not dependent on any commodity and is entirely dependent on our understanding. Just like other modern currencies, currencies based on peer-to-peer systems are more reliable than those controlled by governments.

Frequently asked questions