What about gold itself? Sure, it has some real world usages, like semiconductors and such, but it's priced way above it, simply because people have faith in it as a currency, nothing more.

It's a speculative bubble too. It has a base case of value, as you observe, so it probably won't collapse to nothing and will remain an industrial commodity for the forseeable future, but I'm pretty sure the value will collapse to something more like its actual industrial value (with a bounce to below that value) as soon as it is clear that the economy has recovered. (Which on sufficiently long time scales is quite probable, but I make no claims about what may or may not happen between then and now.)

I've considered a strategy of buying gold post-collapse on the grounds that on the 30-year business cycle, gold will probably be spiking again in the next financial crisis at right about the time I'd be retiring, but that's 100% pure speculation, not buying for "intrinsic" value... but then, I scare quote the term since there really is no such thing.

I also think investing in gold in the case of total collapse is a bit bizarre, because in the event society totally collapses, the only gold that will be worth anything is the stuff in your physical possession, not numbers in your bank account, which the government trivially confiscated (shortly before it discovered that doesn't prevent collapse either, because the government's problem was never having enough numbers in computers). (They can confiscate physical gold too, of course, it's just not trivial.) I know that's not the motivation of every gold bug, though.

With all due respect I think you both misunderstand the principle of Gold as currency (or bitcoin as currency for that matter).

Currency at its most basic level is a representation of the value generated by the society it is used in. So the number of U.S. dollars represents the entire value of what U.S. citizens produce at any given time.

What makes commodities valuable as currency is they are finite. There's only so much Gold, Silver, and Bitcoins in the world. Since all these commodities can be used as currencies (i.e. they can be converted to paper currency) they represent value beyond just its practicality because it stays consistent as the amount of each fiat currency available grows.

So Gold goes up in value because it isn't really going up in value. Everything else is going down.

"So the number of U.S. dollars represents the entire value of what U.S. citizens produce at any given time."

That's not even close to correct under any theory of economics, I don't even know where to start explaining that.

"What makes commodities valuable as currency is they are finite."

No, that just means they happen to exist in the real universe, in which everything is finite, which is hardly a way of distinguishing between "currency" and "not currency" (in information theory terms, that has no information in it). What makes currencies valuable, and what makes things valuable in general, is that people want them. People want the government not to smash their doors down and haul them away and put them in jail, or freeze their assets, etc. The rest of the value of a dollar recursively emanates out from that. There's a value to having a dollar beyond just the goods and services that can be obtained, it prevents Uncle Sam from destroying you. There's no value to a BitCoin; the base case of BitCoin is "zero", unlike a dollar or any other government fiat currency, unlike gold (which has industrial and decorative uses which may not stay constant but won't drop to zero for a long time), unlike anything else called a "currency". Currencies aren't arbitrary numbers.

(Not being jailed/fined/killed by something may seem like a bizarre base for a currency if you think about it, and I wouldn't disagree. I do rather wish people understood the gravity of treating "government" like a silver bullet and just firing it every which way to solve every problem, especially when turning everything into a criminal law offense. However genteel we've made it over the centuries, it's still pointing guns at people, and I'd prefer to reserve that for truly important things.)

Having dollars does prevent Uncle Sam from destroying you and assuming no one wants to be destroyed, everyone wants them. This makes the dollar a pretty good medium of exchange (a short term store of value) but not very good as a long term store of value.

Gold is still valuable as a medium of exchange largely due to historical reasons but the problems of moving gold, storing gold and using gold for very small transactions outweigh its benefits for anything other than a store of value, gold is simply too crippled to be used as a currency.

Bitcoin aims to fill that gap by having similar properties to other successful stores of value, (durability, reasonable finiteness) along with medium of exchange properties like fungibility, but at the same time being digital and thus adding properties like near instant transfers (on a global scale) and near infinite divisibility.

Its not certain if Bitcoin will be successful, something better might turn up to replace it, but IMO a purely digital currency definitely has a future.

> The real backing that a US dollar has is not its gold. It is the fact that the US government has declared itself obligated to accept tax payments in terms of US dollars, and it will not accept anything else.

So, how about if someone would get a farm of computers mining bitcoins, at a rate where the bitcoins pay for the electricity etc, but then they also rent out this computing power for anyone to use for whatever purpose (like Amazon), but for this accept payment only in bitcoins, being the exact amount of bitcoin that would have been mined otherwise with the computing power rented out.

Would that work?

Then you back it with something else of value, namely computing power, but you only accept bitcoin as payment.

Just a thought, though.

In my opinion, a cryptocurrency with real backing may work. However, at the risk of being redundant, it does have to be real backing. I have to be able to really trade my currency for the real backing at any time. Including in a "run" situation, because ironically the inability to weather a run on the currency radically increases the likelihood of a run. It can't just be an "in words" backing, where everyone politely agrees that there is a fictional backing, because in a significantly-sized economy, somebody will figure out how to exploit the difference between the real and perceived backing... which manifests as bringing the real and perceived backing into forcible equilibrium.

There's at least two major problems with your particular proposed backing: Computation power isn't actually worth that much, and the value of a given amount of computation power is sinking fast, and will continue to do so for the forseeable future. This creates practical problems in providing enough backing to power an economy. And a couple of "bonus problems": Allowing people to perform arbitrary computations on your hardware can have certain legal problems, and the process of solving this problem may raise nontrivial overhead. Backing your currency with a service rather than a good has interesting implications in a "run" situation because you've added an unavoidable temporal component to the process of cashing out the currency, which is the sort of thing you could probably squeeze a PhD thesis out of describing the precise effects of that, but I doubt they're very good. But at least it would provide a non-zero backstop to the currency, which would be a start.

(Interestingly, if we ever hit a final equilibrium on the price of computational power, note my two major objections go away. While some practical problems remain, one could imagine the rest could be worked out. Could a computation-backed BitCoin variant be what powers Economy 2.0 in Stross' Accelerando?)

I understand this causality as: People must pay taxes in USD, so they need to eventually convert whatever currency they use in business into USD, in order to pay their taxes (or go to jail). And this gives USD the backing - having it keeps you away from jail.

But what happens if you do business entirely with an unofficial currency like BitCoin, do you have to pay taxes based on some arbitrarily converted USD value? Or can you escape taxes altogether?

While specific details would require competent tax counsel, and there are a lot of specific details, the general rule is that if you receive anything of value that can be converted into dollars at a fair market price (which I use in a sort of technical sense, not just as a wishy-washy term, the IRS knows how to obtain a reasonable approximation of this value), the IRS will hit you in some form for that price. BitCoin has reasonably well-established values in dollars which can be used, should it become successful enough for the IRS to care it will be even more firmly established what the dollar value of a BitCoin is, and if nothing else the IRS can always assign a market valuation to the other side of the transaction, the thing being purchased/sold.

When you win A New Car! on the Price is Right, you better believe the IRS and all relevant local tax municipalities express no confusion on how to tax you for it. BitCoin would not be particularly different. Without a rigid wall completely separating the BitCoin economy from the greater global economy (in which the USD is only one player), the greater global economy will tend to efficiently price a BitCoin. ("Efficiently price" is a technical term, what it means in this case is that the conversion rate in some sense has a real existence and isn't just a polite fiction, though there's a couple of simple logical steps betwixt the raw definition and that conclusion.)

There is basically no escape from taxes, other than any that may be explicitly laid out in tax law.