In responding to a thread on one of the more popular hardware review sites on the Internet I was exploring my thoughts on what actually backs Bitcoins. This was in responce to some of the comments questioning the validity of Coins that were posted. Any thoughts on the validity or retardedness of the following post I've made on where I consider the value of Bitcoins to come from is appreciated. It's kind of a rough cut, but it's essentially how I view its value.
Link to forum at bottom for reference.
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Bitcoins are created, bought, and sold all day long everyday.
Let's compare it to a Fiat Currency like the USD. USD are created out of thin air with a keystroke, unlimited amounts can be created with current banking practices with little to no oversight, they can be counterfeited, and they are bought, sold, and traded for goods and services worldwide. USD are backed by nothing.
Bitcoins are created with a little more effort(but lets just equate mining to a keystroke for this point). Unlimited amounts cannot be created because of the way the Network designed. All Bitcoins are created with oversight of all people participating in the Bitcoin Network. Bitcoins cannot be counterfeited. While to a much smaller scale, Bitcoins are bough, sold, and used worldwide for goods and services as well. Bitcoins are backed by the resources and currencies used to purchase them.
What I mean by this is the following.
Let us think of Bitcoin Network as an empty water jug filled with beads beads for a moment. When water(Value) is poured into the jug(Network) the beads begin to rise. When enough water is poured in to force 1 bead out of the jug you've got yourself a Bitcoin. Water in this exmple is ofcourse a currency or service of some sort. As long as the water is in the jug, the Bitcoin is backed by that value. Pour more water in, receive more Bitcoins, and add more value to the Network. Take water out, and you will exchange Bitcoins for value previously invested in the Bitcoin Network.
As more Bitcoins are generated, the water jug gets bigger. If no new water is added to the jug, the value of a Bitcoin starts to dilute as the invested resources in the Network are even distributed among all the coins. Kind of like having a glass of Koolaid. If the glass with the Koolaid in it becomes bigger but no extra Koolaid mix is added to the water, the taste of Koolaidness becomes diluted in the water and loses its value as a tasty drink.
So in essence you can say that Bitcoin's weakness is that if no one uses them then the value will degrade over time as new Bitcoins are produced an added to the Network. Obviously this is not the trend as Bitcoins have increased in value from pennies up to around $13-14 and use of them for a multitude of reasons is up and rising everyday.
So ya, feel free to pass Bitcoins by, there are plenty of other people with more sense than that out there. I am one of them.
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http://hardforum.com/showthread.php?t=1623740