Casascius, let me return to your first post from this thread:
Each 10 cent change in the price supposedly changes the value of the whole Bitcoin economy by over $500k USD... which leads me to believe that something's just not right. There is a huge disparity here. Someone should not be able to create or destroy $500k worth of "wealth" by moving only $15k.
Wealth is not created by moving money through an exchange. Wealth is created in the productive economy outside of the exchange. (Well, actually the percentage fee charged by the exchange is part of the productive economy, but that's beside the point.) So it is not the case that a 10 cent change in the price changes the value of the whole Bitcoin economy.
What the exchange rate provides is an approximation of the perceived value of the items being traded. It's an approximation because it only reflects the value as perceived by those who are carrying out the exchange. Nevertheless, it's a data point that can be useful for some purposes.
In addition, the bitcoin exchange rate depends on what the traders think will be the future value of the productive bitcoin economy, based on the time preference of the individuals carrying out the trade.
So if the "real" value of the bitcoin economy doesn't come from the exchange, but is just approximately reflected by the exchange, where does it come from?
Sure, some of that value comes from people who are trading in bitcoin today. There are some people using Bitcoin to pay for ads, tips, servers, hosting, Amazon purchases, gambling, porn, auctions etc. But the level of direct trade is not enough to account for the bitcoin exchange rate.
There are also a lot of Bitcoin-related assets being created. Every piece of software written to handle bitcoin transactions; every new service being designed and implemented; every new idea being tried out; these things are all building assets that can provide a bitcoin income in the future. And that's
where the rest of the value comes from.
No doubt 90% of the Bitcoin business assets that are now being created will eventually fail. But some of the remaining 10% may become spectacularly successful. It's a "wild west frontier zone" for people who want to try out new and interesting business models.
When someone trades bitcoins, they (perhaps subconsciously) take into account many factors including the current level of the bitcoin economy, the potential future level, the psychology of others, and their own psychology (e.g. time preference and adversity to risk).
Every trade has a buyer and seller. So every time someone buys bitcoins (because they guess that the bitcoins will be worth more to them than the dollars), someone else is selling bitcoins (because they guess that the dollars will be worth more to them than the bitcoins).
Therefore the rising price of bitcoin on the exchanges doesn't mean that Bitcoin is a "sure bet". It just means that for the two people conducting that trade
the agreed price is somewhere between the two people's estimation of the value.