It has value because another individual, company or (possibly) government cannot prevent you from doing what you wish with your coins. It has value because the majority cannot vote to redistribute your funds or attempt to paper-over economic problems by printing additional bitcoins. In summary, it has value because it behaves less like a human invention/institution and more like a phenomenon of nature itself. Just like there's nothing in the world we can do to stop gravity, we must also be unable to stop the ceaseless chaining of new blocks upon the Blockchain.
Sorry, I was not blessed with the necessary Faith.
Put your feet on the ground again, please, and wake up. We cannot create anything even remotely similar in robustness and permanence to a new law of physics. The Bitcoin network is a minuscule hardware and software artifact, that survives only because a few thousand people are willing to keep it working. If a few hundred (or maybe even a few dozen) of those persons changed their mind, the network would stop. Or the protocol could be modified, e.g. to randomly toss coins around and make half of them negative, or whatever.
It may seem impossible to get those people to agree to that, because of incentives and bla bla. But, physically, the energy required to change the neuronal state of a million bitcoiners, so that they start hating the thing, is maybe less than the charge of an AA battery. And the wiring in their brains is such that one would not need some sci-fi mind-reprogramming zap gun, but only send the right signals through their eyes and ears. I don't know how to do that, but it is absurd to claim that it will never happen.
The point, again, is that all human constructs are astronomically small and fragile; doubly so for virtual constructs; triply so for virtual constructs -- like bitcoin, the euro, or the US democracy -- that depend on a collection of humans behaving in some 'rational' way.
Bitcoin in particular has already failed in its primary goal. The network is still churning, and most bitcoiners still believe (or pretend to believe) that it has proven itself robust; yet it is anything but.
Bicoin, as stated by Satoshi, was designed to be a system for p2p transmission of money that does not require trusting a third-party authority. But his solution, the Bitcoin protocol, does not do that. The protocol still depends on trusting that the miners who retain a majority of the mining power are interested in preserving the network.
Satoshi apparently assumed that mining would be fairly spread out among the users, who would be well spread out over the world. From that assumption, one is expected to conclude that any majoritarian subset of the miners would be so large that they would not collude, and could not be coerced, co-opted, or tricked into any particular behavior. From that assumption, furthermore, one should conclude that there would be a majoritarian subset of the miners who would have a simple, greedy and rational behavior; meaning, that they would choose to play by the rules, if that choice maximized their expected revenue from block rewards and fees.
However, things did not turn out that way, and in retrospect it is perhaps obvious that they couldn't. The total reward paid to the miners turned out to be large enough to make mining a very profitable activity, provided one could muster a significant fraction of the hashing power. To maximize his profit, a miner had to increase his total hashing power and lower his operating and capital costs. As we know, these facts led to the development of hashing ASICs. Economies of scale then made large miners mor eprofitable, and this advantage led to the extreme concentration of mining power that we see today.
The largest miner will usually grow the fastest, so in time it will have a majority of the hashing power all by itself. The GHash.io pool briefly reached this state, but then it claimed to have voluntarily limited its growth to remove that very visible risk. Even so, today the 4 largest know mining entities have ~54% of the total hashpower.
I don't know whether this size+technology race has been going on since the very beginning, or whether it started only after the price rose to a certain minimum level. If Satoshi had chosen a different reward and fee schedule, or if bitcoin had never attracted the attention of speculators and hoarders, then the price today would probably be around 1 $ or less, the total mining reward would be only ~3600 $/day, and perhaps the race would not have started yet. However, if bitcoin (or any similar crypto-currency) were to gain widespread use, it would have to reward its miners well in order to ensure a robust network; and then the size+technology race would occur anyway.
By now, everybody should be aware that an entity or cartel with the majority of the hashpower has absolute power over the network. For starters, it can effectively disable the whole network and starve other miners, by selfish mining of empty blocks. But then it can also use that capability to "convince" most users (including exchanges and payment processors) to accept changes in the protocol (such as extension of the reward schedule and/or increased fees). In the same way, it can convince most other miners to cooperate with the cartel. These changes would probably include details that further consolidate the power of the cartel and gradually lock the users in, so that they will have to accept more radical changes. (In general, any entity that can jam some process for a sufficient time can force the users of that process to accept anything that is not as bad as the jamming itself.)
Therefore, it is already a proved fact that
the bitcoin protocol does not work. All users now have to trust a 3rd party authority, namely those 4 companies. These miners must be trusted not to collude, and not be coerced, co-opted, or tricked into violating the network's "terms of service", such as inviolability of accounts, irreversibility, no-double-spending, etc.. That assumption could have been justified for a set of thousands of miners, but not for a set of 4.
It does not matter whether those 4 companies
will form a cartel, or
will abuse their power. The mere possibility of them doing so already requires us to trust that they won't. And it does not matter if they will always seek to gather the most bitcoins, or if they will have other external motives: in fact, the concentration of hashpower, the takeover of the network by a small majority, and the changes of the protocol are all predictable outocomes of the assumption that every agent will behave in a greedy and rational manner.
The price does not matter, too. It may recover in the next few months, perhaps even go to a new all-time high. But the
only advantage that bitcoin was supposed to have over other payment systems -- not being controlled by a central authority -- is not there. Inevitably, it will lose is "market" to traditional systems; that are just as centralized as bitcoin, but much more efficient. Even those who love bitcoin because of political idealism will abandon it -- precisely because it does not meet their ideals.
This is not my own view, of course. This fact has been known for quite some time, and has been pointed out by many critics; and no one has provided a glimmer of hope that this flaw can be corrected.
Among bitcoiners, I still see a lot of denial, with people disputing the ability or willingness of a majoritary cartel to exercise their power, or assuming that a larger coalition of 'rebel' users can prevail over such cartel, or predicting that individual pool members would desert the cartel.
But in the last couple of months I have been seeing also many bitcoiners who seem to have internalized the fact, and are now scrambling to find a way to save their investment -- or at least convince the public, for a while longer, that they have found a solution and are working on it.
EDITS: Grammar and typos
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I don't think there is a better time to get involved then this week, I can see it shooting up within a couple of weeks. I signed up for an exchange and sent $1500 to buy a few coins. It looks like a great investment at these prices.
