I have to admit that I'm sceptical about Bitcoin. I'll give you my reasons, then please convince me!
I'm optimistic about Bitcoin, but not fanatically so. I'll try to give you some additional considerations.
Bitcoin is not backed by anything. 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.
Whether a currency is "backed" by anything is of little importance, at least inasmuch as all money is backed by a mere belief in its value. In other words, money -- no matter what form -- ultimately has value because people believe it has value. This holds true whether we're talking about fiat, gold, oil, whatever, etc.
Possibly the most important characteristic of money is that people can agree that it holds a common value. In a bartering economy, this does not hold true. For example, a gold coin considered outside the context of price consensus (i.e. outside gold's purported value depicted in the gold markets) may be much more valuable to one person than another, such as when one person needs a good electrical conductor and the other person doesn't, etc.
To this extent, a digital currency is arguably superior to gold. You can argue that it is precisely because 1's and 0's are arbitrary and intangible that consensus of value can be achieved. For example, sugar might be considered an "intrinsically valuable currency" since it has nutritional value outside of social consensus. But, do you think that sugar is more valuable to a normal person or to a diabetic? The arbitrariness of pure math can avoid this issue.
Also consider that the Blockchain
is valuable in a way that Bitcoin as a currency is not. Bitcoins derive their value in part by their integration with their own Blockchain. Bitcoins would lose their value consensus if, say, only the Litecoin Blockchain existed. So, as it turns out you
can make an argument that bitcoins have some intrinsic value, but in the sense that useful bitcoins are inherently tied to the Blockchain (which is why testnet bitcoins on the testnet blockchain are worth jack). The most profitable BTC companies to date are typically those that facilitate transactions on the Blockchain (and thereby increase its value and utility) such as payment processors, exchanges, and casinos. The more the Blockchain is used and develops in the complexity of its inter-connectivity, the more socially valuable it becomes.
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. 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.
The value of something is always related to something else. Let's imagine, per your example, that BTC is backed by gold. So, you can take 1 BTC and sell it anywhere in the world at market value and receive predictable sum of gold. Okay, great.
Now you have gold. Now suppose that after some time passes you want to sell your gold. How valuable is that gold? How did it get its value?
The point is that there are two (2) things that can
always be stated about value: 1) Value is always relative and is thus subject to change, and 2) Intrinsic value does not necessarily equate to consensus value. Because consensus value
is required for a good form of money, and because value is always subject to change,
the natural conclusion is that intrinsic value of money really doesn't matter at all.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.
There are two things I want to say, here. First, inflation in and of itself is not bad, but actually can be very good for tempering certain market conditions; the only real problem is
irresponsible inflation. Second, alternative cryptocurrencies don't work with the Bitcoin Blockchain. Sure, if new alt-coins emerge and people decide to move BTC holdings into those alts, then you can imagine it as though Bitcoin is being inflated (even though it isn't) because the sum of all cryptocurrencies in total will have inflated. But...
...I actually wonder if this is precisely why Satoshi didn't allow any room for inflation whatsoever (except by way of a hard fork). In other words, I wonder if foreknowledge of alt-coin development led to the decision to make BTC completely deflationary, as a naturally-evolving inflation mechanism to help temper cryptocurrency markets in general would arise from the alt-coins themselves.
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.
I think it's a little fanciful to think BTC is valued today because people are fearful of the dollar. I can't imagine that very many people use BTC primarily for ideological reasons, and if they do then I'm guessing money isn't especially tight for them right now (else it would be insane to speculate on this market). I simply think BTC is valued today because its unique features allow it to be a preferable form of money transmission with specific regard to certain types of transactions. Someone may use BTC for online gambling while using fiat for every other transaction in their lives, for example. In my case, I prefer to sell things for BTC rather than fiat because I can avoid chargebacks and the enormous fees of eBay et. al., and because of the ease and timeliness of international transactions.
If people are really worrying about their privacy, they're probably doing something illegal or are irrationally paranoid (if you're instead talking about things like the seizure and confiscation of banking accounts, then I can concede the point, especially if you're a Cypriot). Collecting all data everywhere is certainly unsettling, but filtering through that data is completely different. If you aren't doing anything illegal or suspicious, there's simply no good reason to waste time and resources to parse through all that extraneous data. I admit, though, that I'm not a fan of this kind of data collection. It is unsettling.
I don't think the primary value is privacy. I think the primary value is its integration with the valuable technology of the Blockchain, compounded by its growing use.
