[grovulent]

Folks make this statement: "but a currency must have backing, or intrinsic value" and feel that they have just proved bitcoin can't work. But not many contributors seem capable of stating WHY they believe this. Care to elaborate?

In any case, I think it's entirely possible that you're wrong, and I've written a long argument against your claim if you're interested:

http://reviewsindepth.com/2013/12/bitcoin-krugman-and-the-me...

The TLDR is that yes, historically currencies have required intrinsic value or government backing of some kind - but it is not an economic law of nature that a currency has to be backed as such. If you can get the economic costs of securing agreement over a currency, then a currency of "mere agreement" is possible. Given that the internet and the design of Bitcoin itself have dramatically reduced those costs - it may actually have a shot at gaining wide acceptance.

[nicholas73]

Another point is to look at the position of sovereign wealth, large banks, and investment funds. If you held a trillion dollars, would you park it in a currency that is backed by a state, or trust that kind of money with mere agreement? Would you put most of your net worth in bitcoin?

Now let's allow that bitcoin has become universally accepted and is indexed to some basket of goods. Then it should be reliable as a currency, right? Well, yes, it'll be an international currency ... just like the Euro! And what we saw in the last few years is that the Euro system is inherently unstable because of unbalanced trade and uncontrolled government debt. You have the PIIGS countries facing the choice of massive debt service or withdrawing from the currency altogether. You have the wealthier countries being forced to support the deadbeats from their own tax base.

In the end, currency is what people make it out to be, and people will game the system. Whatever system bitcoin settled upon will have its own problems. At least with a state backed system you have players who have self interest in mind.

[nicholas73]

There are two things a currency needs - wide acceptance and store of value. Your point about agreement can solve acceptance, maybe, if there is enough impetus to switch (like a failing dollar).

However as it store of value it fails because people holding currency do not want volatility. Dollars are created in response to increase in goods; bitcoins are created by algorithmic mining. There is a disconnect in creation vs. supply of real goods, therefore the value of bitcoin will fluctuate more. You might say that bitcoin's positive value increase bias makes people desire it over dollars, but that would cause people to hoard bitcoins only to dump and crash the market.

Now, you can adjust bitcoin by CPI, but then you'd just transform bitcoin into a system just like other currencies, along with entrusting a central banker and other problems.

The transactional advantage seems nice, but there is no reason a system can't be set up for dollars either.

I'm not going to say it's never going to happen, but it seems unneeded at this point.