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By the same token, cryptocurrencies are backed by the computing networks underlying them, the potential future usage of these computing networks, and by your ability to buy guns, drugs, and hacks with them. This is also not gold (although you can buy gold-backed cryptocurrency: see Digix), but not nothing either. That's why cryptocurrency evangelists harp on adoption and new use-cases: the value of any currency is primarily set by what you can spend it on. Right now you can spend Bitcoin on a lot fewer things than US Dollars, but your personal profit potential from holding a currency derives from the rate of increase in adoption, not its current level, and Bitcoin has a lot of room to grow while the dollar has virtually none.

Tether intrinsically has none of these, but because of its adoption by many exchanges, it's convertible into other currencies that have more intrinsic value. So as long as it remains convertible, it will continue to have value.




USD is backed (among other things) by the government accepting taxes in it. If you don't pay, they will come to your house with guns and take you away. This creates a demand for USD that is completely unlike any demand for crypto.


Again this weird argument. If the USD were valued due to its tax-demand, raising taxes would increase the value of the dollar!

Also the gov creates more supply to the dollar than the tax demand always, so its not really clear. And most taxation is a percentage of income or value measured in dollars itself.

This argument never clicked for me: where is it coming from?


The argument is not that this is controls the USD value. Instead, the argument is that this gives an intrinsic base value to the USD. This base value means people have some reason to hold USD, which causes them to make other transactions in USD. The actual current value from USD comes from the other transactions, but that is not intrinsic to USD. Instead, it is an emergent property.

The intrinsic value of USD is consoling, because it prevents the value of USD dropping to 0, hence there will always be a possibility of the emergent value reappearing.


This is correct, raising taxes would increase demand for dollars. Supply is greater than the tax demand, but much of the additional demand comes from the tax in dollars requirement. Since businesses have to pay sales tax in dollars, they're inclined to only accept dollars to avoid complex accounting and exchange rate liability. Being able to transact with US businesses is a large source of dollar demand.

It's also worth pointing out that income doesn't always translate to inflows of physical dollars. Complex corporate accounting standards often result in recognizing revenue before any cash is received, and non-cash transactions that affect income.


> with guns

Umm, yes?


...the same way that Bitcoin could, in theory, be backed by hired goons (or drones) that come to your house with guns and take you away. It wouldn't surprise me if that's how people in the underground Bitcoin economy (drugs, gambling, sex trafficking, arms dealing) actually operate, though I try to stay away from those peoples so I wouldn't actually know. There is certainly a difference in degree - the U.S. military is orders of magnitude more powerful than whatever goons you can hire with Bitcoin - but not a difference in kind.


That's an interesting analysis. I hadn't thought of it that way before, simply because I wouldn't really value any other currency that way. I.e. I would not consider the growth in the ability to use euros in additional countries to have much impact on their value. I guess my thinking is that as long as there are exchanges, you can buy anything with bitcoin just like you can buy anything with dollars.

What sets that exchange rate is demand for bitcoins, and demand for bitcoins would be equivalent to what you can buy only with bitcoins. So, I guess in a way that tracks to exactly what you describe. The part that doesn't track is the profit potential. Currency speculation is an interesting thing, but it doesn't usually track with the use of a currency.

I am pretty bearish on the long term viability for cryptocurrency growth, though. I expect transact in bitcoins about as often as I transact in any other currency...almost never. There are no wages, products, services, or geographic areas that require the use of bitcoin.


Over the long term currency prices do track with currency use, where "use" is investment in securities denominated in the currency + a country's net exports. As the country's export economy grow, a foreigner can buy more things with the country's currency. The free-market value of the currency should rise. If it does not rise, then goods from that country will be underpriced relative to their true value, which means they will be overly competitive in the market, which causes a flood of cash into the country (a current-account surplus). Eventually the market rebalances as the currency becomes un-pegged and starts to float freely.

This is what has happened with the U.S. and China over the last 3 decades. As Chinese goods became more competitive on the global market, American export dollars started to flow into China. China refused to remove the USD/RMB peg, which created a long-term current account deficit in the US and made American goods & labor non-competitive with China. When they finally did remove the peg (after significant political pressure from the US), the value of the RMB rose significantly: it was 1:8 a decade ago, it's now 1:6.73.

Over the short term there are a lot of conflating factors - pegs, speculation, interest rates, wars, creditworthiness, etc. But over the long term, the "backing" for any currency is what you can buy with it.




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