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Monday, April 15, 2013

What is the value of bitcoins?

Bitcoin’s wild ride was the biggest business story of the past few weeks.
Over the course of less than two weeks the price of the “digital currency” more than tripled.
Then it fell more than 50 percent in a few hours.
Suddenly, it felt as if we were back in the dot-com era.
The economic significance of this roller coaster was insignificant, but the fuss over bitcoin was a useful lesson in the ways people misunderstand money — and in particular how they are misled by the desire to divorce the value of money from the society it serves.
How is bitcoin different? Unlike credit card transactions, which leave a digital trail, bitcoin transactions are designed to be anonymous and untraceable.
Bitcoins are in a sense the ultimate fiat currency, with a value conjured out of thin air.
Gold’s value comes in part because it has nonmonetary uses, such as filling teeth and making jewelry; paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes.
Bitcoins, however, derive their value, if any, purely from self-fulfilling prophecy, the belief that other people will accept them as payment.
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