Bitcoin: Currencies Are Backed By Cultures

I've been watching the recent bitcoin crash, as well as the surrounding online furore, and it's made me think about what currencies are backed by a little more. Obviously bitcoin isn't backed by anything in particular - I see more and more people pointing this out online. The reply to this from pro-bitcoin people then being something along the lines of:

"Well, the dollar/pound/euro [insert fiat currency] isn't backed by anything either."

However, though this is a good point to make, it isn't really true in quite the same way. Fiat currencies, although not backed by a particular commodity, are backed by something much more powerful: an entire culture.

Particularly the state force manifested by that culture.

So, for instance, here in the UK we use pounds sterling. This is backed by a state that controls a large area of land. That has an army, and tanks, and law, and the power to enforce that law, and to collect taxes, and to jail people who don't pay their taxes; and so forth.

This power to impose a currency and demand taxation in that currency can be tyrannical, or it can be democratic, or something in between - i.e. it manifests however the politics of that country or state manifests.

Still, on top of this state power the currency is also backed by the wider culture that chooses (or is forced) to use it. How trustworthy that culture is. How innovative it is. How strong that country or culture is on the world stage. Its historical track record and reputation. All these things back a currency.

The Culture of Bitcoin

This then returns us to bitcoin. The question being: what culture backs bitcoin?

hope / HODL

Bitcoin isn't backed by a state, with state force. So it definitely isn't backed like the dollar or the pound is. Yet still, you don't necessarily need state force to have at least some cultural backing.

For example, no state is forcing an individual to value gold. The value of gold is largely derived from the simple fact that we live in a wider culture where gold is valued. In every major culture of the world the idea that gold is valuable is ingrained in the collective consciousness. A view that has been ingrained and embedded in our worldview over centuries and millennia.

Perhaps if we found an undisturbed tribe somewhere they might not care for it. They may deem it just a shiny rock, but for us the value of gold pervades our culture and history.

[I discussed the psychology of gold (and bitcoin) here: Metals, Markets, and Digital Jewellery ]

The question then for bitcoin is how many people believe in bitcoin like people believe in gold - and how ingrained is that belief. You can be fairly sure people will still value gold in 20 or 30 years time, the concept being so culturally pervasive, but bitcoin is relatively new. Will it be a fad? Or will the people who swear by bitcoin now still be as passionate and invested in it in a few decades time.

I personally have no idea what the answer is to this question. So remain open to either possibility.

Cultures without state force..

To flesh out this issue of "culture" further it might be worth considering other strong cultures that don't have a particular state. You could take the Amish as an example. Though the Amish don't have their own state, they still carry a fair degree of weight. So, hypothetically, if they were to issue some kind of token or currency you could perhaps have a high level of confidence in it.

• They have a trustworthy culture.
• They have a strongly ingrained set of cultural values: so you can have confidence that they'll still hold their current values in 20, 30 or 40 years time.
• There are quite a lot of them, i.e. they have strength in numbers - meaning if the wider state (in this case the U.S. government) did try to ban or suppress their Amish currency it would be quite difficult.

A similar, though more warlike example of a strong culture would maybe be the Taliban. Again - they have strength in numbers, and a strong set of cultural values that are heavily ingrained - and that they're prepared to defend. Hence why entire states and their militaries have failed to quash them.

So groups of people with a strong set of shared cultural values can wield a lot of influence. Even though it's not quite at the same level as state power, they can kind of exist (or compete) independently of states.

So what culture surrounds bitcoin?

At present it seems to be quite a mix. Ranging from genuine believers in the concept, to get-rich-quick types, to outright grifters. There are also some big companies and players involved (perhaps even state actors). It's quite broad. The confusion enhanced by the fact that many of the true believers also want to get rich quick too.

If all these people simply fizzle away when the going gets tough and there's no more money to be made then obviously that would bode badly for bitcoin. Alternately, if there is indeed a hardcore of people that genuinely believe in the concept - and to an extent that this belief will persist throughout their entire lives, then that may be different.

If there's a culture of people - where belief in bitcoin is tied up with other beliefs, such as belief in liberty, or religion, or gun-ownership. Or whatever the set of values may be. Then that would be something that could help support an alternate currency or store of value.

Other cultural currencies..

Of course, you could take this understanding that currencies are backed by culture and apply it to other crypto-coins or currency concepts. A few days ago I tweeted that holding currency is like holding shares in a totemic flag, representing a particular culture or worldview.

Perhaps you could deliberately create a currency that is tied to a set of values in some way. I mentioned a few posts back about potentially buying shares in Stonehenge. There you'd be investing in, but also sponsoring, a particular cultural artefact. An artefact that symbolically represents something more than the material artefact itself.

A totem pole. You're buying shares in the flag (and the values) you're rallying around.

Again though, we already have something not a million miles away from this with national currencies. I use pounds sterling partly because I'm forced to by my government, but also partly out of choice. British people aren't happy with the state of inflation at the moment (something of an understatement), but at the same time we're not exactly on the verge of overthrowing our government and demanding something new. So we consent to it to some degree.

We also choose how much we invest in it to some extent too. For example, if I have money in my bank account I can choose to keep it all there in British pounds, or I can take some of it out and invest it elsewhere. In gold, or other assets and currencies. So again, even just as individuals we all have these small ways of exercising power in the real world.

In fact, I have shares in U.S. dollars in American companies. As a Brit no one has forced me to do this. I've chosen to do it - partly because I believe in the values of America.

In contrast I haven't chosen to buy shares in Chinese companies because investing in a non-democratic country doesn't appeal to me. That wouldn't reflect my values. As much as I like and admire Chinese people.

So our economic choices are often deeply entwinned with our beliefs. These individual choices, multiplied by the numerous people making them, can aggregate into something quite potent.

.. as I'm still not sure what the core beliefs and values of the bitcoin community are I'll remain on the sidelines in this arena too.