This is, among other things, because there is a whole lot of loose money floating around that can easily jump between currencies. We are probably going to see a lot more of this in the Bitcoin world, which I expect has a lot more volatility ahead of it -- somewhat ironically in this case, as the increased liquidity promotes volatility, since it becomes an instrument of pure speculation that was previously too difficult for professional traders to deal in.

In any case, I also had the intuition around the $11-12 mark that bitcoin was a good investment, since the major hurdles around the security issues were probably ironed out, but didn't invest anything -- probably because deep down I'm a value investor and don't see a lot of value in driving speculation in something that doesn't have inherent value (despite the many interesting technical aspects to Bitcoin).

Economically speaking fiat is a currency that exists by rulemaking instead of having an inherent value— it's constructed. The definition doesn't say who does the constructing or how.

Bitcoin is a fiat currency— the fiat is embedded in the software that runs on and is enforced by all the Bitcoin nodes, it's the rules that make the currency exist and work. It's largely immutable, participated with by consent, transparent, and cryptographically strong in the way no government fiat is— bit it is technically a fiat currency.

This is no big deal unless you make the Internet-liberitarian/goldbug mistake of thinking fiat is a dirty word.

So, based on that definition, it is true that Bitcoin is not a fiat currency because it is not given value by law or government. However, although it technically does not have a centralized issuing authority that can arbitrarily create Bitcoins, Satoshi Nakamoto did hard code a creation rate for Bitcoin. In a sense, he is the original issuing authority. The only difference between Bitcoin and fiat currencies, when it comes to currency manipulation, is that Nakamoto committed early on to a specific plan for issuing currency. The government (or the Fed) not only does not make that commitment, but it is unable to make such a strong, unbreakable commitment, although it verbally makes similar commitments all the time.

What is a law or a government in any case? Bitcoin is created by rules. The rules are embedded in a program instead of a law-book. The governed users opt in by using the software rather than by living in some geography. The rules are enforced by being mathematically unbreakable rather than with courts and prisons. These factors alone shouldn't be especially significant, other than that they make Bitcoin more just and efficient.

In fact, with respect to money creation there are not a lot of set rules. The main problem is keeping supply matched with demand. From a governmental standpoint demand is usually enforced (at the very least by forcing taxes to be paid in your currency).

In other words, your criticism would be considered a design feature by many economists. Some even considered adding a fee (demurrage) instead of facilitating inflation, encouraging you to use whatever money you had. This would be akin to a 1% asset tax instead of an income tax.

There is also a voting mechanism that can change the Bitcoin protocol, the NSA for one probably has enough computing power and bandwidth to flat out 'take over' the network and give themselves arbitrary bitcoin amounts.

PS: Voting is a basic problem with all network based protocols. If enough machines say this is what happened then that's what happened.

We can argue about whether or not that is a good thing, but let's at least be clear about what we're talking about. Using definitions of words that are different from what everyone else uses is not the way to communicate your ideas to other people, let alone convince them that you're right.

I disagree on many points, but the easiest to argue is that it does, in fact, have inherent value. At its most general, that value is in allowing people to make exchanges they wouldn't otherwise be able to make. In particular, that sadly seems to be centered on drug trade. The fact that someone designed the mechanics has little to do with it.

Back when BTC was close to USD$30, I was wondering how much meat there was to it. I had enough that if the market was going to vanish it would be a damn shame if I didn't cash out (so to speak) before that happened. After a bit of thought I decided to hold on to the BTC. I made a comment to a skeptical friend that "bitcoin can't fail." Then came the compromises and the price of BTC dropped like a stone.

I was disappointed, but I didn't feel like I'd lost my tiny fortune. When I made the statement to my friend, I knew what people were using it for. I was confident they would continue to find value in it and the price would rise once again. My prediction has been satisfied. I don't feel like my confidence was ill-placed, or that I got lucky to see the rebound and no edict has repaired the shaken confidence of BTC traders.

Well, you could say the exact same about every currency. If you are a chicken farmer, it is easier to buy a pound of pork for $5 than trying to trade your chickens for a slab of a pig (i.e. barter). All currencies provide value, since they are a lot easier than barter. The question is not that, it is whether or not they are based on something of inherent value.

There is an online market (of goods) built around BTC because of its particular properties. This market wouldn't exist without it. You can't sub in barter or gold or most other forms of money, and especially not anything that leaves a record.

The nonsense argument about BTC being a fiat currency is confused. There is an authority in a sense that dictates the mechanics (but I see it much like the 'rules' for determining what is and isn't gold.) However there is no authority that confers value of any kind to the currency.

  MV = PQ

With US dollars the government (or central bank). tries keep M at a level where Q doesn't move around too much, but bitcoin doesn't and can't have an institution like that.

Your equation is actually saying the opposite, that the value (P) of each bitcoin is inversely proportional to the size of the bitcoin economy (Q):

MV = PQ => (refactored) =>

(MV)/Q = P

Hence P ~ 1/Q.

Thinking about it more, I think you may have Q and M mixed up. From a supply/demand point of view, the greater supply of bitcoin (M), relative to demand at least, the lower the value (P).

If we assume aggregate demand can be approximated by overall size of the economy that uses bitcoin (Q), then

P ~ Q

and

P ~ 1/M

so

(QV)/M = P

hence

QV = MP

Right?

PS: For comparison WoW gold is a much larger currency.

This is why so many are coming out in favor of metal-backed currencies, because it restrains governments in what they can print to pay their own bills and their ability to devalue the savings of the populace (as Venezuela just did minutes ago, devaluing the savings of its citizens by 47% in one fell swoop).

There may also be things that have "inherent value" insofar as they are necessary to the continued existence of humanity, whether or not we perceive them as so. Damaging our environment beyond a certain degree would certainly be this. Unfortunately international governance has not risen to this particular challenge and fully utilized available technology (e.g. carbon credits).

Apart from the claim on a country's treasury which is implicitly backed by a country's resources. Sure, this isn't always reliable, as in the case of countries like Zimbabwe, but they're very much the exception rather than the rule. Bitcoin's fiat value is posited on the artificial scarcity of something that doesn't have any particular utility in the first place. Gold at least has the virtue of looking nice and having useful physical properties (malleability, non-reactivity, high conductivity).

We'll see if you really believe that is true if you ever find yourself having to pay taxes but lacking the money needed to do so. Fiat currencies do have value: their value is in their ability to cancel debts (like taxes).

If I smash the hope diamond and then get the pope and four world leaders to urinate on it— then surely the resulting mush would be the most rare and costly constructed substance on earth. It would also be worthless.

To have "inherent" or "intrinsic" value means that the actual material has marketable value. For a US dollar coin, if you melted it down, the copper, maganese, nickel and zinc is worth about $0.06. The value of the paper of a US dollar is a fraction of a penny for recycling purposes.

A bitcoin is more like paper currency -- it has no intrinsic value. But because of the predetermined control of new coin production, it will display characteristics similar to silver or gold coinage.

Those characteristics include something that nobody talks about -- the "discovery" of new coins. There are likely large dark pools of bitcoin that the initial adopters generated very cheaply. Dumping those pools on the market will have similar effects that gold rushes had.

And it goes the other way around anyway. Higher prices lead to more people mining.

For example not everyone likes shiny things but gold is also compact, protective, conducting, nonreacting, testable, etc.

Wood has a thousand and one uses but it's a bad currency because in addition to being bulky it's easy to make more wood. But in certain circumstances it would work fine.

There is barely any use people can get out of bags of sand, so it wouldn't work as a currency. Salt looks similar but used to be hard to get and is important to food and living, made a great currency.

Bitcoins by themselves don't have value. You could make a hundred knockoff block chains and they wouldn't do you any good. The bitcoin network as an entity that you can trust is where anything useful is actually derived from.

You have to take a look at society's motivations, situation and psychological makeup, and from there you can make a prediction as to whether a currency can be trusted or not.

"It's a common misconception that Bitcoins gain their value from the cost of electricity required to generate them. Cost doesn't equal value – hiring 1,000 men to shovel a big hole in the ground may be costly, but not valuable. Also, even though scarcity is a critical requirement for a useful currency, it alone doesn't make anything valuable. For example, your fingerprints are scarce, but that doesn't mean they have any exchange value."

The point stands though, very short term, massive spikes.

On Jan 23-24, there is a 36 hour period where it jumped from $16.8 to $19.2. http://bitcoincharts.com/charts/mtgoxUSD#rg30zczsg2013-01-24... That's the closest scenario I can find. Certaintly not "$15.5 to $20+ in 12 hours".

...given that bitcoin is still around when all blocks are exhausted, legal to most of the worlds population by then and not outcompeted by something better (better marketed?) by then.

Warning: I am no economist, I still don't know what a fiat currency is although I might have an idea after reading this thread.

Fiat currencies are currencies whose demand is created by a legal system. The US Dollar, for example, has demand that is created by law: tax laws, bankruptcy laws, etc. Like anything else, the value of money is determined by supply and demand.