What Is Bitcoin Backed By?

Written by Sean GraytokUpdated: 3rd Dec 2021
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No single person or organization controls Bitcoin. It only has users; it does not have administrators. And yet, it has absorbed over $1 trillion worth of value.

This causes many people to ask, “What is Bitcoin backed by?” This article will explain why the answer to that question is a feature of Bitcoin and not a bug.

What Is Bitcoin Backed By?

It’s worth considering the question “what is Bitcoin backed by?” from two different angles: bitcoin, the monetary asset, and Bitcoin the network.

There’s a difference between lowercase “b” and uppercase “B” when referring to bitcoin / Bitcoin.

Lowercase refers to the digital asset, and uppercase refers to the network. The monetary asset bitcoin is used to exchange value on the Bitcoin network.

The asset is backed by the shared belief that it is valuable, which is true of all forms of effective money. The network is backed by tens of thousands of decentralized computers that maintain the transaction history of the digital asset.

Next, we’ll separately analyze what backs bitcoin the asset and Bitcoin the network.

Delineating the two is semantics, as it’s unrealistic to actually separate the asset’s value from the network’s value but worth doing for the sake of clarity.

Understanding What Backs Bitcoin The Asset

The value of bitcoin is foundationally based on the shared belief that others find it valuable.

This collective, perceived value historically rings true for other store-of-value assets and mediums of exchange.

Money’s technology has evolved over the previous thousands of years, and the best form of money has prevailed each time.

Generally speaking, the form of money that best satisfies the following characteristics wins:

  • Durable
  • Portable
  • Fungible
  • Verifiable
  • Divisible
  • Scarce
  • Established History
  • Censorship Resistant

While people find bitcoin valuable for various reasons, such as its programmed digital scarcity, its incorruptible supply schedule, or because it exists outside the control of the State, each reason can be distilled to one of these traits.

Except for established history, it’s reasonable to make the case that bitcoin is superior to fiat currencies and gold based on these monetary criteria.

These core value propositions will allow bitcoin to stand the test of time, but realistically, people will find value in bitcoin’s number-go-up technology as the network continues to monetize.

>> Related: Is Bitcoin Better Than Gold?

Understanding What Backs Bitcoin The Network

The Bitcoin network’s critical infrastructure consists of miners that are distributed all over the globe.

Miners audit the Bitcoin Blockchain to verify the ledger’s integrity, which is simply a history of bitcoin transactions.

They also process and verify new transactions that get appended to the existing ledger.

Miners are special types of computers designed to solve the cryptographic puzzles that secure the Bitcoin network.

A given mining operation may consist of one miner or thousands of miners that run Bitcoin’s software to maintain the ledger.

Solving the protocol’s cryptographic puzzles requires significant amounts of costly computing power.

In exchange for expanding the resources to audit the ledger and thus showing proof of work, the most capable miner is rewarded with bitcoin each time a new block is mined. This occurs about every 10 minutes.

These puzzles are hard to solve but easy to verify. A miner that broadcasts an invalid solution to the rest of the network will quickly reject their block.

This invalid solution could consist of malicious transactions where a user spends bitcoin that it does not own.

The network rejects these blocks because it’s economically disastrous to build on a block that will eventually be discovered as invalid. Expending mining resources on a faulty chain can cost miners thousands of dollars in electricity, even for a few seconds.

So they’re incentivized to build on the longest chain, which has shown the most proof of work, and therefore the most secure. Additionally, Bitcoin’s encryption makes the ledger immutable, meaning that it cannot be changed — the mathematical laws of the universe make it so.

In sum, Bitcoin is backed by tens of thousands of decentralized computers that are economically incentivized to secure the network by solving cryptographic puzzles and showing proof of work.

Bottom Line: What Is Bitcoin Backed By?

There’s a variety of reasons why people think bitcoin is valuable — whether it be its digital scarcity, global 24/7/365 payment capabilities, censorship-resistant qualities, etc. — but each contributes to the overall value accretion of the asset and the network.

The decentralized backing of bitcoin makes it more robust and less vulnerable to corruption than its centrally controlled counterparts.

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This article is for informational purposes only. It is not intended to be investment advice.

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and leading expert in investing and financial management. His work has been cited in leading industry publications, such as InvestorPlace and Business Insider. Sean is interested in the people and technologies that are improving the world.