Even in our world of fiat currencies, you often hear people saying that only metal or commodity-backed money count as true money. Gold standard is Paradise Lost and we, the unfortunate descendants of monetary equivalents of Adam and Eve, are punished by having to put up with fake money conjured up by fraudulent central banks. Bitcoin is not that different in the sense that it, too, is backed by nothing some may argue that it is backed by math or the ingenious design of proof of work. But as the latest price movements seem to suggest, the electricity bill doesnt translate into prices very well.

What if Bitcoin is backed by a commodity?

Lets assume there is such an institution called the Bitcoin Reserve (not to be confused with Bitreserve, which is a entirely different organization). The mission of the BR is to stabilize Bitcoin prices and the way it does it is by introducing a gold standard, for example, one bitcoin is interchangeable with one ounce of gold. When Bitcoin price falls below this predetermined parity, BR will buy bitcoins from the market at the price of one ounce of gold per bitcoin. As more people traded their bitcoins for gold, the supply of Bitcoin tightens up, sending prices soaring until it reaches the predetermined parity, then BR would start to sell its bitcoin holding, until the price drop below to the one ounce gold per coin level. The same process repeats over and over.

But this imaginary institution probably will only exist as a thought experiment. First, the cost would be forbiddingly high. Since BR is not designed to be a business, such an idea wont make any business sense. Even there is someone or a company in possession of 21 million ounce of gold wanted to do it, will this system work? One problem that may be easy to foresee is that once people are assured that each bitcoin is worth at least one ounce of gold, that information will translate into the price and almost certainly the price will stay above that level. But unlike a central bank in the real world, after BR sells all its bitcoins, it cant run the press to print more. If it still cant bring the price down to the once ounce gold per coin level after having sold all the bitcoins, there is little it can do.

A thought came to me this morning when I was cleaning my room. I have a shelf of English language books (I live in China, where owning English language books is not as common as you may assume and I took a lot of trouble to acquire some of them). Now I no longer read these books and keeping them takes some space in my small apartment I tried to donate them, but couldnt find a school or public library that would accept; I tried to sell them, but again didnt find any store would take them. Selling them on Taobao, the Chinese eBay eBay, is an option but would be too time consuming.

Lately, as Bitcoin seems to have entered a downtrend, I keep hearing people asking what, if anything, would prevent Bitcoin from dropping below 300 USD or 200 USD level.

My thought is that if gold standard is too costly and impractical, will a second-hand book standard, or for the heck of it, a junk standard do? An example is that I offer to sell my shelf of books to anyone, who would pay me two bitcoins. Because my intension is not financial gain, I see myself more like a micro central bank than a book seller. I offer to sell all the books for two bitcoins no fiat money, only Bitcoin and only two. The two bitcoins may or may not be a good value depending what you need these books for and where the price will go and I dont mind if I never be able to sell them for the price. That is not the point. The point is that by arbitrarily pricing the books for two bitcoins, I back two bitcoin with real world asset. I also pledge that I wont change the price and will keep the books for the next five years (at least) unless someone take the offer or an act of god such as fire, earthquake or nuclear attack, separates me from my books. To prove I own the books, I can do proof-of-reserve by taking a picture of my books with a timestamp such as the frontage of New York Times website of a particular day. To prove these books are not fake, I accept third party on-spot audit.

I am not conceited enough to believe my act alone would have any effect on the Bitcoin prices, what I try to do is remind people that they are not as helpless as they may think in front of the all mighty market. If there will be enough people doing what I am doing now there will be what I would call a crowd-sourced Bitcoin central bank that would give the currency some support, and the effect can be profound. Imagine you see a few blog posts just like this one in a day, the psychological effect will eventually factor into the prices, all achieved at a cost that is almost negligible to backers like me, especially when compared with buying bitcoins using your fiat savings.

What do you think a junk standard to boost the Bitcoin prices? Want to give it a try?

Read the rest here:

Can A "Junk Standard" Buttress Bitcoin Prices?