Bitcoins are not backed by anything. This is clearly stated here: https://en.bitcoin.it/wiki/FAQ

In short being backed by something means you can convert it into that. So money that is backed by gold can be traded in for an amount of gold. Bitcoins are not backed by math or computer cycles or anything else because they cannot be traded in for it.

So while you can sort of turn electricity or computer cycles into Bitcoins you cannot turn bitcoins into electricity or computer cycles and so you can't say that bitcoins are backed by either.

Edit: it's worth noting that the US dollar is also not backed by anything however.

> it's worth noting that the US dollar is also not backed by anything however.

Not true - the US dollar is backed by US government taxation. The dollar amount you owe in taxes remains unchanged, while the amount of gold or bitcoin you'd need to sell to pay your taxes is determined only by market forces.

If hypothetically everyone in the US were paid in bitcoin, they'd still owe taxes in USD, which would probably lead to a rush on USD around April 14.

Sorry to be pedantic, but the US dollar is not backed by US government taxation. A dollar is still quite valuable outside the US because people and institutions attach a value to the US dollar, mostly because the US economy has been the largest and most open economy in the world for several decades. Taxes set by the Treasury, like all other market forces, change and are changed by the rest of the economy.

Your example is a classic example of exchange rate problems surrounding floating currencies. Since both the USD and bitcoins are free-floating (though there are powerful institutions stabilizing the USD such as the Fed and IMF), there would be an onus to convert USD into Bitcoin until the relative value of USD was high enough to offset the conversion deficit. That, or there would need to be equally powerful institutions behind Bitcoin to buy other currencies, but it would be very hard given that there is a practical limit to the total number of Bitcoins in and out of circulation.

US dollar is a fiat currency and will stand around even if taxation is zero http://en.wikipedia.org/wiki/Fiat_money

Opposite of fiat is representative currency, which is tied to specific tangible products (frequently previous metals).

Introduction of taxation does not convert a fiat currency into a representative one.

That's a silly definition of "backing" in my opinion. By the definition that backing means "you can convert it into something," what is gold backed by? It's backed by... gold? That doesn't mean anything.

Bitcoins, by the way, can easily be converted into computation and energy. The simplest and most obvious way to do that would be Bitcions->USD->AmazonEC2. Of course there's a billion other ways to convert Bitcoins into useful things, just like gold, because they're simply a store of value with little use for other purposes.

[EDIT] Feel free to refute my argument rather than downvoting me.

In the context of currency, "backing" is typically understood to be referring to guarantees, typically by a government or bank, such as the gold standard: "ensuring" value by "guaranteeing" some conversion rate to something else, especially something else considered to have some "intrinsic" value, to stabilize the value of the currency.

This is of course a fuzzy line. And you're right, there are other definitions of "backing" which render it a meaningless term. But the distinction is a useful one for discussing these matters, so what terminology would you prefer instead?

When he says "you can convert it into something", what is meant is something of intrinsic value. So gold does not need to be converted into anything, it already has intrinsic value for its use in jewellery, electronics, etc.

I deleted my comment because I concluded it's obvious and contributes nothing to the conversation.

But since you replied I will say: Yes it is backed by nothing. There is no central bank. It's funny that you draw comparisons to gold's lack of intrinsic value because the whole point of central banking is to move away from storing shiny objects in vaults, and in that regard Bitcoin is a regression. (Replace shiny objects with shiny prime numbers.)

I don't think the point of central banking is to move away from shiny things stored in vaults. I think the point of central banking is to consolidate macroeconomic power in the central bank, so as to e.g. promote growth of the nominal GDP by maintaining a so-called healthy rate of inflation.

And, as I mentioned in a cousin comment, I think the whole definition of backing is just silly. Bitcoin is backed by trust in math and computation, but gold and the USD are backed by trust in people and government respectively. Gold is trusted since it's been in use for thousands of years and is widely used as a store of value. The USD is trusted because the US government has been relatively stable (and powerful) for a while now.

> There is no central bank.

OK, let's suppose for some reason there is a sudden inflation of the US dollar...

Please, asveikau, can you explain a single precise example of what the "central bank" can do to help in this case that causes a net improvement?

Will they invent an "un-printing press"? Will they get people to turn in the excess dollars by exchanging them with gold? Please, asveikau, explain what it is that a central bank can do in this situation that justifies its existence.

Central banks have already invented the un-printing press, and it is perfectly possible for them to intentionally deflate a currency (vastly if desired) through the use of OMOs and also simply by increasing the fractional reserve requirements for other banks. This is totally normal and non-theoretical central banking stuff.

http://en.wikipedia.org/wiki/Open_market_operation

http://en.wikipedia.org/wiki/Fractional_reserve_banking

This is admittedly a good and intelligent retort to my comment. However, I did use the term "net inflation" so this raises the issue as to whether time-shifting the monetary supply by selling bonds/raising interest rates via OMO really counts, since it usually merely postpones the increase in monetary supply (i.e. more money needs to be printed to cover the interest payments this requires, and the principal will eventually come due.)

However, you are right though that adjusting reserve requirements does generate a net sink for excess monetary supply, though it is of limited capacity. Also, it is not a very viable tool right now, since bank reserves are already at an all time high.