Unlike traditional forms of money, bitcoin isn’t backed by physical assets or government policies, instead, it’s backed by a novel system that uses decentralization, incentives, energy, and cryptography.

To properly answer “What is backing bitcoin?,” we first need to establish what “backing” means.

In the context of money, “backing” historically meant a currency that was directly linked to a specific quantity of a commodity, like gold. This system, known as the “gold standard,” provided tangible assurances of the currency’s value as it could be exchanged for set quantities of a valuable metal.

In 1971, the US dollar’s gold-backing ended, along with that of all other major currencies. This marked the shift to “fiat” money (from the Latin word for “decree”), where the money’s value relies on government policies and public trust, rather than redeemability for gold.

Neither gold nor fiat money are backed by redeemability for anything or by any ability to generate cash flows. They are “base-layer” monetary assets, meaning their value relies on their inherent properties and the assurances that those properties will persist into the future. People own gold or fiat because they’re useful for storing and/or exchanging value, made possible by their reliable monetary properties:

• Gold: Gold’s value relies upon its resistance to corrosion, ease of verification, physical weight, measurable purity, and natural scarcity, which are established by the unchanging laws of physics. Additionally, gold’s superior scarcity is safeguarded by the economic barriers of production, since there is no other way to produce gold other than through energy-intensive work.
• Fiat money: Fiat’s value relies upon government-mandated acceptance for taxes, debts, and legal transactions, combined with public trust in the issuing authority’s ability to maintain its value. If policies change or the authorities print money excessively, the money’s value could drop and popular trust could be lost (see 1920’s Germany, 1990’s Yugoslavia, 2000’s Zimbabwe, or 2010’s Venezuela).

Base-layer monetary assets are backed by nothing other than themselves and the forces that assure their valuable properties will persist into the future.

Bitcoin is the same. It’s a base-layer monetary asset, backed by the forces that assure its valuable properties will persist.

How is bitcoin backed?

Bitcoin is a peer-to-peer electronic cash system, letting people acquire, hold, and spend bitcoin in a similar way to traditional forms of money.

Bitcoin has valuable monetary properties, including:

• Scarcity: Bitcoin has a fixed supply limit of 21 million bitcoin
• Divisibility: Each bitcoin can be effortlessly subdivided into 100 million satoshis
• Portability: Bitcoin can be moved digitally and securely transferred from one person to another without a 3rd party intermediary by authorizing the transaction using their unique private key

These valuable monetary properties are established through a novel system that combines decentralization, incentives, energy, and cryptography.

Let’s examine.

Decentralization of rule-enforcing nodes

Bitcoin’s monetary properties are defined by its rules, which are encoded in Bitcoin’s free and open-source software and run by a global network of independent computers, called “nodes.” The rules determine the operations of the Bitcoin network (uppercase “B”) and the characteristics of the bitcoin asset (lowercase “b”):

• Network operation rules: Transaction formatting, node connectivity processes, the block time interval, the mining difficulty adjustment, etc…
• Asset characteristic rules: The supply limit, the supply schedule, the divisibility of each bitcoin, the authorization requirements for initiating a transaction, etc…

When you operate a node, it connects to every other node in the network to share valid transaction information. Any transaction that violates the rules is easily detected and automatically rejected by each and every node. Although any node can change their own copy of the software, thereby altering their version of Bitcoin’s rules, no one can force other nodes to adopt those changes. The unchanging nature of the rules is what establishes the reliability of Bitcoin’s monetary properties.

This network of countless independent nodes forms a globally decentralized system that collectively ensures the integrity of Bitcoin’s rules and operations. Each node operates equally and redundantly, meaning no single node holds unique authority or is critical to the network’s operation. This decentralization ensures that no individual or group can unilaterally change Bitcoin’s rules while safeguarding it from censorship or shutdown.

➔ Assurance: The rules that establish Bitcoin’s monetary properties can’t be changed, blocked, or banned by any individual or group.

Incentives

Although nodes are free to adopt new rules, such as increasing the supply limit, any transactions they process under incompatible rules would conflict with all other nodes’ rules and be instantly rejected. This makes the effort pointless, as their time and resources would be wasted. The same principle applies to Bitcoin mining: producing a valid block is resource-intensive, and if any transaction within that block violates Bitcoin’s rules, the block will be rejected, the miner’s energy wasted, and no rewards issued.

Nodes and miners are not only incentivized to avoid rule changes, they’re incentivized to strictly enforce established rules. The unchanging nature of Bitcoin’s rules assures its monetary properties are reliable and its operations are stable, giving rise to Bitcoin’s value. Node operators want their own valuable transactions accepted, while miners want to earn valuable bitcoin rewards. This incentive alignment creates a system where:

• Adopting incompatible rules is costly: Breaking consensus leads to rejected transactions and wasted resources.
• Enforcing existing rules is profitable: Stability in Bitcoin’s rules secures its value, protecting nodes’ transactions and miners’ rewards.

➔ Assurance: All network participants are financially incentivized to uphold the existing rules and avoid any rule changes, ensuring the reliability of Bitcoin’s monetary properties and continued operations.

Energy and computational power (aka “hashpower”)

Bitcoin mining involves computers performing computational work, called “hashing”, to earn a set reward paid in bitcoin for each block of transactions they add. This is how new bitcoin are issued, new transactions are added, all previous transactions are re-asserted, and the entire network is secured against attack.

The only known way to produce a valid hash is by using energy in a computationally-intensive process of trial and error. However, once a valid hash has been found, it’s trivially quick and easy for each node to mathematically verify that it’s correct. This asymmetry between the difficulty of mining and the ease of verification means only miners who have mathematically proven to have expended real world resources can add blocks, while verifying validity remains simple, efficient, and widespread.

A key rule in Bitcoin is the mining difficulty adjustment, which ensures blocks are mined roughly every 10 minutes, regardless of the total computational power (hashpower) of all miners. Every 2,016 blocks (roughly 2 weeks), mining difficulty automatically adjusts to maintain this pace, making mining harder if hashpower increases and easier if hashpower decreases. This dynamic scaling keeps block times and the supply schedule consistent, while ensuring mining remains efficient and profitable, incentivizing ongoing participation.

The combination of mining with the difficulty adjustment creates a global, decentralized, scalable, and open competition that ties real-world resources (energy and compute hardware) to the supply and operations of Bitcoin. This system ensures:

• Predictable supply schedule: Block intervals and the supply schedule are maintained by the difficulty adjustment, regardless of the total hashpower deployed by miners.
• Transaction processing: Transactions can’t be blocked by mining bans or miners colluding to produce empty blocks, as mining is an open, global competition where miners can join or relocate freely and empty blocks miss out on transaction fees.
• Miner incentives: The difficulty adjustment ensures global mining remains profitable for the most efficient miners by dynamically scaling with network hashpower, keeping revenues above expenses and sustaining or increasing miner participation.
• Transaction permanence: Reversing a transaction requires re-mining all subsequent blocks and exceeding the network’s total computational power.

➔ Assurance: Bitcoin’s monetary properties and operations are secured by energy, as new bitcoin can only be issued through energy-intensive work, while attacks on its supply consistency and transaction security are deterred by a globally distributed network of incentivized energy resources.

Cryptography and mathematical principles

Bitcoin relies on cryptographic hash functions and the use of immense numerical spaces to create computational barriers against attacks. Hash functions, like the industry-standard SHA-256 used in Bitcoin, generate unique outputs from input data. Even the slightest change to the input completely alters the output, and there’s no known way to reverse the process.

Alongside hash functions, Bitcoin’s use of extremely large numbers ensures the security of private keys, transaction authorization, and mining rewards.

• Private keys: Bitcoin private keys come from a numerical space with approximately 115 quattuorvigintillion possible combinations (a number with 78 digits). This immense scale ensures it’s computationally impossible for anyone to guess your private key, even with all the computing power on earth.
• Transaction authorization: To authorize a transaction, your private key generates a unique digital signature. The strong reliability of hash functions means there is no known method to reverse engineer your private key from the signature or the hash output of a transaction.
• Bitcoin mining: To add a block and be rewarded, miners must produce a valid hash that meets the network’s required output and difficulty. There is no known way to produce valid hashes other than completing the energy-intensive proof-of-work.

➔ Assurance: The security of bitcoin ownership and mining operations is assured by industry-standard cryptography and mathematical principles.

Summary

Bitcoin is a base-layer monetary asset, designed to store and exchange value–a fundamental human need.

Its value relies on its robust monetary properties, which are assured through a novel combination of decentralization, financial incentives, energy resources, and cryptography.

This assurance isn’t abstract, it’s tangible. Real nodes enforce Bitcoin’s rules globally, real miners use computational resources and energy to secure the network, and industry-standard cryptography underpins its security – the same cryptography that secures global financial and communications networks. The entire system is self-sustaining as all participants are aligned through transparent financial incentives to promote Bitcoin’s continuation and defend against attacks.

Dismissing Bitcoin as “unbacked” because it lacks physical presence or government oversight is to miss its revolutionary innovation. Bitcoin is the first successful peer-to-peer electronic cash system – something entirely new – and its innovative design to link real-world resources and established cryptography to let people hold and exchange value is worth your attention.