Quote from: Melonhead on April 19, 2013, 12:18:52 AM

Very interesting question. The answer is no. Bitcoin does not need and should not be "backed" by anything. To really understand the issue, however, we need a little history lesson. Gold used to "back" paper money because everyone knew that gold was money and paper money was just a money substitute. Gold was perfectly good money for thousands of years. Paper money was originally (starting in the middle ages for the sake of argument) just a warehouse receipt given to the owner of gold who chose to store his gold in the goldsmith's safe. The goldsmith gave the customer a receipt. That was the first paper money. That receipt was redeemable on demand for the quantity of gold printed on the receipt. In other words - gold backed the paper.

Over the years, people got used to carrying around and trading paper receipts (which were more convenient than gold) and would use them as a substitute for actual gold. But everyone was acutely aware that the paper was not the money. The gold that backed it was the money. In those days (and before that as well), gold's value was overwhelmingly based on its ability to be money. See my post https://bitcointalk.org/index.php?topic=169517.msg1871316#msg1871316 on inflation and the properties of money. As time went on, people started to forget about gold and started to believe that the paper receipts were money. The problem with paper money is that it is much easier to debase (inflate) than gold. Governments hate gold (as they will hate bitcoin) because then cannot simple "print it" to fund their welfare/warfare states. There are numerous examples in history of governments (in bed with the goldsmiths) creating paper currency (out of thin air) divorced from any real gold and thereby destroying their own economies. (I include all modern electronic versions of official currency when I say "paper money".)

The reason history and common sense says that paper money needs to be backed by gold is that gold is the market winner (over thousands of years) in the contest of what is the best money. Its money properties were almost single-handedly responsible for the advancement of civilization from barbarism to the modern world.

So, when x backs y, x is money and y is the money substitute. As long as people honor the one-to-one relationship between x and y, it's perfectly ok for gold to back paper money or even for bitcoins to back paper money. So, nothing should back gold because gold is (or was) money. Sadly, society has been so far removed from gold for so long, that gold no longer really qualifies as money. And while Bitcoin doesn't quite qualify as money yet, it may someday, and as such it might back something else (even informally). Something as simple as an IOU on the back of an envelope that says IOU 4BTC qualifies as paper money backed by bitcoin.

Final thought on gold. I read a few years ago that if gold were still commonly understood to be money it would be worth over $20,000 per ounce. The reason for this is that the nominal value of all the goods and services in the world divided by the weight of all the gold in the world comes out to about $20K. I could be way off here, but you get the point.

I think you might find the professor's book http://www.amazon.com/Capital-As-Money-ebook/dp/B009AP9ZG6 interesting. The Kindle version is free right now. He proposes the idea that money is better when backed, but that how it's backed is tricky. It SHOULD be backed by the value of the economy. A reasonable approximation of 'the economy' is the largest publicly traded corporations....using something like S&P500 ETF shares. To purchase Bitcoin, for example, you should have to put 1 or 10 shares of SPY on deposit.

I think it has potential.