I have to admit that I'm sceptical about Bitcoin. I'll give you my reasons, then please convince me!
Bitcoin is not backed by anything.
None of the currencies are, unless trust in the central banks can count as a form of backing.
It would probably not exist in a free market. Money in a free market has always been some kind of commodity. Something that has value beyond its use as a currency. The problem with Bitcoin is that it has no value beyond its use as a currency. Why should it then be regarded as money? Money came into being as a medium of exchange, so that if you got stuck with it it was useful in some way. It wasn't just a piece of paper. It was something that was useful in and of itself. Like gold. Like silver. Bitcoin has none of that. It's just a string of 0s and 1s. Where does it get its value from? I don't think in a free market it would be valued.
Well, if money is a medium of exchange in the strict sense, gold and silver can't be considered money. I can't go to the supermarket and pay with gold or silver. They only accept notes and coins of the Central Bank and credit/debit cards. Following the same path, a national currency isn't money outside the country.
Something like Bitcoin could be used as a currency if it was backed by some commodity to do anonymous/quick transactions, but there would be a standard, ultimately, for exchange. It would always be exchangeable into e.g. gold.
National currencies aren't backed by commodities, but they still are useful as currencies. Anyway, there are some places where you exchange bitcoins for gold, so I don't get the point.
So that the banks who issued the Bitcoins were contractually obligated to redeem them into gold. Then Bitcoin would serve as a currency, but the money would be the gold.
For this purpose, there are gold certificates. Anyway, Bitcoin isn't issued by banks. It's generated by miners. Also, the banks aren't obligated to redeem a national currency in gold.
There's also the problem with Bitcoin of inflation. Yes, there's a fixed amount of Bitcoins qua Bitcoin, but anyone can create alternative cryptocurrencies. I don't see why Bitcoin has any unique features that cannot be replicated by others, and therefore you will create massive inflation in a digital coin space.
The creation of alternative cryptocurrencies has nothing to do with Bitcoin inflation. They are created to offering features which doesn't exist in Bitcoin, or to just try a different approach. Sometimes they are created just to do a pump-and-dump.
So why do I think Bitcoin is still valued today? I think it is because people are fearful of the dollar. They think it's gonna get useless, and they're looking for alternatives. Bitcoin is a product of this fear. Also, I think people are worrying about their privacy. And with good reason, given the growing government intrusion in our lives. People are looking for ways in which to remain private. In which to remain outside the government's abitily to monitor them. Bitcoin provides that. So right now it's providing a value. The value as privacy. The value that it's not paper money. But in a fre market, which we are all working to realize, I do not believe Bitcoin would exist.
If you want privacy, I think cash is still better than Bitcoin.
Regarding the question of free market, I strongly disagree with you. In a free market, we have the freedom to create our own currency without ask to the government.
Good point about confiscation (e-gold). What about stability? Without being backed by a commodity, how do we keep the value of Bitcoin stable? Under a gold standard, the stability of the money is pegged to the value of gold.
The answer is simple. Bitcoin doesn't have a stable value. There isn't any mention to "stable value" in the Bitcoin's whitepaper. Gold also doesn't have a stable value. But you still trust in gold.
But after all, why Bitcoin? In my opinion, because it's a honest and secure way to pay someone for goods and services.
Paper money is created according to the desire of the governments and central banks.
Credit and debit cards are just numbers typed in computers. They aren't secure, they can be easily cloned, so you have to trust the merchant won't try to scam you.
Banks work with fractional reserve. So, when you tranfer the fund from your bank account for another bank account, they are just tranfering numbers or a "eletronic promise to pay in paper money, even without sufficient paper money for this" from your accountto another. In case of a bank run, the banks go to bankruptcy. With Bitcoin, you don't have this, nobody will give to you a "promise to pay in Bitcoins", they'll pay with the Bitcoins like the same way with paying in cash. In other words, with Bitcoin, you can have more control over your money than in a traditional bank,.
Note: it's still posible to have fractional reserve with Bitcoin. Mt. Gox is a example of this. But in the Bitcoin you can avoid this. In banks, no way.
Also, gold and silver are complicated to send over the world. With Bitcoin, you can send any amount, paying a low fee, to any place of the Earth.