Not quite. The confidence in "normal" fiat currency arises not so much from government backing, but from the fact that a well-managed national currency envelopes the GDP of a national economy. Government really needs fiscal discipline to not break the system (the consequences are well known); the trust part comes from the health of national economy and intersection of interests of all involved players.

Consider a major issuer like USA or Eurozone. The strength of their currencies stems from strength of the backing economies. In theory, the government could try fooling the system and run the printing press amok. In practice, such a government would be very short-lived, as it would piss off just about every person with money.

Save for outliers like Zimbabwe, there aren't really many cases of modern governments running themselves in the ground like that. Usually, runaway inflation is a consequence of a catastrophic event in the economy (bubbles, wars, loss of markets and other externalities).

Now, a super-fiat currency like Bitcoin is not backed by anything like that. It is a virtual construct with finite supply, and crypto is just a production vehicle here. It envelopes no economy, so the all trust here comes from compound interest of people who invest into it.

Then again, it’s entirely possible that we will be proven wrong.

Once for all practical purposes everyday life is handled in satoshis, how does an economy expand?

Basically, a full bitcoin economy is a bit like an economy on a gold standard. Not perfectly, since gold is still being mined, and the rate of mining depends on its price.

It makes rational sense for merchants to accept BitCoin and to keep some holdings in BitCoin because the price is increasing at such a rapid pace. Why wouldn't you want to sell something for x BTC today when that amount could be worth twice as much tomorrow? For the same reason it doesn't make a whole lot of sense to spend a BitCoin. Eventually the currency will level out when the incentive to spend equalizes with the incentive to receive. This might not happen for a while as long as speculation remains the predominant driving force.

It has loads of benefits over using the dollar, but a lot of those benefits are lost the second you're having it exchanged.

For instance, if I wanted to use bitcoin for contracting, my clients would have to convert their dollars into bitcoins, then I'd accept the bitcoins smoothly and easily, and then I'd have to exchange them (sell them) back for dollars to buy groceries and pay for the bus. Whereas right now, I get an Interac e-transfer and in less than 30 seconds I have money I can go to the store with, and it cost the sender only a dollar in fees. Sure, it's taxable, but the second I convert it from bit coins it's trackable anyway.

I definitely think this is a model we're going to see a lot more of in the future, but Bitcoin with it's thousand dollar and rising valuation and constant fluctuations is very difficult to get behind and actively use. And with the number of people, just of the people I know, who bought in hoping to cash out, there might be quite the tumble on the way. Who knows though, it will be interesting to watch, that's for sure.

Simple: as a merchant, I really like Bitcoin because it reduces fraud to absolutely zero for me (transactions are irreversible)!

By this logic you should put all your available cash into bitcoins right now. Are you? If not, why not?

So the question is will it crash to 0? Seeing the price soar to 1,000 means that people in the future might always be willing to purchase it at some price, hoping that it will return to that level.

Though, as it stands I don't think speculation gives it credibility. People who believe that are creating the positive reinforcement cycle so common in economic bubbles.

Another poster made me aware of this joke that I think summarizes Bitcoin pretty accurately. http://www.getamused.com/jokes/pennystock.html

Only in this case it's not a single buyer.

i.e. completely invalidating the comparison.

Found the link: http://www.youtube.com/watch?v=zz_yfB72S9c

...governments were accepting gold for tax purposes, kings were filling their treasuries with gold, armies were sent to steal gold from other countries, etc. Gold was absolutely tied to government when it was used as currency, and I am using the past tense here because gold is not a currency outside of a few highly niche markets.

"What really makes a currency is confidence"

I think you are confusing confidence with demand. What makes currencies work is demand -- the fact that everyone in the market demands the currency. Typically this happens because of a government, or more precisely because of a government that enforces certain laws.

"so can strong crypto"

Oh yeah? Let's just assume that Bitcoin actually qualified as "strong crypto." I'll release my fork of Bitcoin that is identical in every way, but happens to have its own block chain that I started using this post. How successful do you think that will be as a currency? Why can't we all just create our own personal block chains (and thus all be rich)? There is more to the story than "strong crypto."

Not very convincing. If anything, the speculative phase matches the growth process bitcoin enthusiasts have predicted.

wut. you do know what middle-ages, gov't issued currency was made of, don't you? and who funded the new world expeditions? and for what reason? and you do know that even given the spanish crown's desire to repay their debtors, the bulk of that gold and silver windfall ended up going to china to fund their switch away from paper money by the Ming dynasty?

acting like gold != governments is... well, frankly, it's ignorant.

For example, physically shipping hundreds of kilograms of gold (or physical, folding USD) is a costly exercise fraught with security risks, and the risk profile varies depending on many factors, for instance the political situations in the sending and receiving countries.

Transferring large amounts of electronic USD across international borders via the traditional banking system is going to invoke all kinds of reporting requirements, and possibly higher transaction costs (though you can do large wire transfers for like $25 I think).

Transferring arbitrary amounts via bitcoin is easy, secure and the transaction itself is cost-effective (notwithstanding the current relative difficulty/expense of moving large amounts of fiat currency into and out of bitcoin in the first place, which problem I'd expect to ease as the btc economy matures).

Now let me ask you: do you really feel a global currency is worth less than $12 billion USD? The market cap for Facebook is $113 billion. Call me crazy, but I think there is more long term value in a digital currency with the properties of Bitcoin than a social network.

In order for bitcoin to be useful, it's going to have to grow. If it grows fast (network effects) then you'll get instability. I don't think there is a solution to this unique problem. The fiat solution of printing more money doesn't apply here. There has never been a sudden rush to USD like there is to bitcoins. If you can even call a few billion dollars a "rush". If bitcoin is to be used, then it's going to see $1000/coin and beyond.

i'm sorry, i try to be polite but.... jesus.

i am 1000% confident that this particular bitcoin implementation of global currency is worth less than $12 billion USD. you are treating this currency like we are dividing up slices of the world money supply. We are not. People are paying $1000 and basically receiving an IOU from no one, with the hope they will be able to sell to future speculators.

If Bitcoin succeeded as an actual currency, it would be trivial to implement new blockchains and many such systems would exist in parallel (Litecoin, Ripple?). But so far, Bitcoin has proven nothing regarding stability, it is just wowing naive investors by increasing in value rapidly.

The problem in your analogy is that Facebook never sold accounts for $1000 because people are not that stupid, except when they start seeing $$ signs flash in front of their eyes. And why does it need to keep increasing in value if its divisible to like 6 decimal places? It's perfectly usable as a currency now. This is the internet, who the fuck needs WHOLE NUMBERS.

Just....... jesus, man.

You display a nearly D-K effect when you act as if these are foregone conclusions with your "Just....... jesus, man." Especially after the catastrophe that was the last paragraph about price&divisibility. It's completely nonsense from an economic perspective. And there are clear benefits in using a highly divisible currency (and especially since it can be represented as a whole number... rather than a float. Ironic, whoops).

If we had a bunch of "units" of something we have 1 each and there are 10 total. We use them to buy melons and each 1 is roughly valued as 1 melon. Then people see the success our new system is having and want to use our units to buy melons as well. So, one of the 10 friends decides its a smart idea to sell his unit for 2 melons to someone who really wants to be a part of our cool club. The next day someone else sells their unit for 4 melons because even more people want in.

Is every unit now worth 4 melons now just because someone sold one for 4 melons to an outside trader? If I go to the store where I used to buy a melon for 1 unit and tell them now that I think I deserve 4 melons for a unit, what will they say?

Explain to me how you think storeowners should react or how Bitcoin is unlike this. Sincerely, I will listen as best I can.

Well, yes. That's why currencies increase in value, because they're in demand. That's why the value of the pound or dollar or whatever goes up and down.

> If I go to the store where I used to buy a melon for 1 unit and tell them now that I think I deserve 4 melons for a unit, what will they say?

Who knows? They might refuse to sell at that price. They might see that if they don't sell to you, you're likely to import melons more cheaply than you can buy them locally.

The storeowner should react by buying melons in bulk using his units and then selling them to you more cheaply than you can import them yourself. Bitcoin is not unlike this. It's the same. Things are worth what people are willing to pay for them.

But really even if they accept Bitcoin for 4 melons that doesn't mean they have embraced Bitcoin. It is just a credit to the power of Bitcoin's infrastructure that the trading network is there to accept the coins, no?

That's my biggest worry. Bitcoin culture seems to believe that at a certain point all individuals will give up resistance and embrace/adopt Bitcoin, whereas there are many many barriers standing before that and I believe it is only the trading network that is strong. However, I do not believe Bitcoin is a stock, so I'm not sure what it is.

What do you think, sir/madam phaemon?

Well, of course they don't. Things have just got worse for them. But that's exactly what happened to many local retailers when their customers realised they could get stuff cheaper by ordering over the Internet than they could buying locally. It's just how things go.

> However, I do not believe Bitcoin is a stock, so I'm not sure what it is.

It's an infrastructure. It happens to have a currency built in on top of it, but at heart it's an infrastructure. Its worth depends entirely on what people do with it, like the Internet itself.

So, it's a little meta to consider what a currency that's an infrastructure is worth in it's own terms, but no-one has to decide that....just let people pay what they want for their share.

I definitely understand the value as an infrastructure, but this is the web. Better solutions will emerge and could just co-opt the Bitcoin infrastructure. Like the way ISPs came in and bought access to the data lines of phone companies, same idea.

Uh, no he doesn't. He only takes Units. We're talking about your hypothetical melon salesman, remember?

> Better solutions will emerge and could just co-opt the Bitcoin infrastructure.

Probably. I would certainly hope so! That doesn't stop Bitcoin being valuable right now and new solutions being more valuable in the future. There's no reason not to have several competing digital currencies on the go.

All these threads are "Yay Bitcoin reached a new price plateau, proof that it's perfect!". So finally they pick an article that says it's a mess, but the thing is it's pretty much the dumbest article ever.

So then the Bitcoiners use it as a straw man, coming on saying "See this article's author is dumb he doesn't have our enlightened view of economics.... If you divide all the world's money by the number of Bitcoins I'm so rich!!!"

I'm sorry but even 3 years existence proves nothing, as there are many screwed up things in history with longer lifespans than that.

So yeah I'm frustrated as hell because this is pretty much the spam of the tech world now but it's front page news on HN every 20 minutes with some new story like "Researchers believe Bitcoin founder once visited zoo in Denmark". One could argue that it is a cargo cult, one could argue that it is a success, a failure. Many things could be argued.

The one thing that I think is for sure is that this whole phenomenon is tabloid-esque garbage that is mostly servicing greedy arrogant Bitcoin holders and their machine, since publicity seems to be one of the only true price correlates (nothin odd about that, huh?). I'm probly gonna get off this bent just because it's not worth the time but without the detractors Bitcoin is just like a digital Jonestown - every post is met with more mindless optimism and every criticism with a response that is a complete non-sequitur followed by boo-hooing about hurt feelings and poor etiquette. I'm not on an online forum to get popular agreeing with everyone I'm here to test the waters and see what kind of knowledge is floating around.

Those I've had arguments with fail to articulate even simple points. For example -- I agree that using a highly divisible currency is good. That was, in fact, my point. My issue is that a frequent explanation for the rapid price increase is "Well it's natural that the coins are going to gain a lot of value. Heck, maybe Bitcoin will surge in the real estate market and 1 coin will be worth a whole house!". With a highly divisible currency, why would the unit price have to increase to represent some arbitrary figure in the market (a house in this case). Because it seems logical to people? Because there are only a limited number of Bitcoins in circulation so of course there is scarcity and rather than using a different currency that can release more we simply have to bid the price up because "well, SN is god after all"?

If anything the fact that I want to argue should show that I do respect the potential of the community in that I actually want to take my time to interact with them. It shows that I give them the benefit of the doubt that even though I disagree I still think "well let's not write it off as a cult just yet". But when I get responses that are as cock-eyed and zombie-ish as the one above ("why analyze supply and demand curve when soon the entire planet will soon be bitcoin?!! i will own your country merely for investing now.") i will probably continue to lose my shit. So yes, I will need to stop looking.

This provides a much higher value floor, no ?

What if these protocols are not so easily displaced as you imagine?

When people compare to internet & DNS & things like that I get kinda pissed off. Those are standard protocol that we agree to because it helps ensure successful communication. Bitcoin is not anything like this stuff, it falls more into the category of "some code that runs on the internet".

Think of it more like a website (Facebook) instead of providing the false analogy that its like the internet itself. If Facebook were an open-source trading platform and it started looking askew, what do you think people would do? (hint: open-source)

Very much fits the analogy with Internet or the web.

ad hominem is bad enough dont bring in semantics please. in bitcoin there are 3 types of people -- hypemongerSpeculators, techDesigners, nonBelievers. The hypemongers call all the nonbelievers trolls, the trolls talk trash to the hypemongers for blindly defending a greedpile, and the techDesigners (who are supposedly the enlightened HN readers) generally don't care.

The only reason I even bring these arguments here is cuz all the HN headlines are hypemonger trash. I'm readying myself to accept this model of Bitcoin forums and move on, lol

$1000 per coin is speculation, but it's not particularly different from a startup people are buying into purely because of where it might be in five to ten years. The effect on Bitcoin is magnified somewhat because the maximum number of shares is capped.

Unless something radically better than Bitcoin comes along, I don't see it being replaced any time soon.

11,666,666 troy ounces

$15,108,332,470 at today's prices.

If you do count jewelry, increase those figured by approx. an order of magnitude.

http://www.wolframalpha.com/input/?i=400+tons+of+gold+in+dol...

You really need to see it as a powerful idea, not just a speculative asset

In practice, no one suddenly got richer because they'd gotten all this new gold, they just experienced massive inflation (and forgot to peg their tax rate to it, so their revenues collapsed but their expenditures did not and they went bankrupt).

Because it turns out you can't eat gold nor make weapons or ships with it.