Honestly? The rapid rise caught me quite by surprise. Silk Road was pretty much the place to spend Bitcoins; it was by far the biggest marketplace in which Bitcoin was the preferred currency, rather than just some nifty gimmick. I expected the fall of Silk Road to decimate the value of Bitcoin, as it put a massive dent in people's ability to do anything with their Bitcoin holdings.
The skyrocketing exchange rate for Bitcoin should not be mistaken for "value". People talk about the "value" of BTC relative to the USD or EUR, but the term "value" implies that there's something intrinsically virtuous about Bitcoins and that that something is growing. This, of course, is false. Money of any kind, remember, is a proxy for the barter system; I build you a website for $5000 and then buy a thousand $5 cheeseburgers with that paycheck only because it's more convenient than making a website in exchange for a thousand cheeseburgers directly. When I agree to that $5000 fee, that agreement is motivated by what I can buy with that fee, not on the fee itself; by itself, the fee is of course meaningless. And what can I buy with Bitcoin? Not a lot, unless I convert it to USD first.
Now, the more BTC is used as a speculation instrument, the less stable it is as a transaction medium, and therefore the less it's used for commerce. I'm not going to agree to build your website for any amount of BTC if I don't know what I'll be able to buy with my fee tomorrow. I'm serious; if you told me right now (with BTC ~$500) that you'd pay me 10 BTC to build you a website (i.e. a $5000 value as of 2:00PM EST 2009-11-20), I'd tell you to go sit on it, as would any other rational worker who's not in on it solely as a speculative instrument. As such, the very act of speculating ironically drives up Bitcoin's exchange rate while simultaneously driving down its value.
This does not bode well for Bitcoin's future. It strongly suggests an endgame where handfuls of individuals sit on very large stockpiles of BTC that they refuse to part with for anything short of astronomical sums, while the rest of us merely ignore them and continue using more established currencies with more predictable day-to-day trade-in values. These "Sirs" will steadily cash out, one by one, as they come to the same realization that they need to convert their BTC to USD in order to turn their theoretical wealth into actual Ferraris and mansions and yachts. They will mostly sell solely amongst one another; every time one of them decides to cash out, the ones who remain will agree to pay his insane prices because they'll each believe that they in turn will be able to ask for higher prices still when it's their turn. At some point you'll have basically one guy (or a group of guys) literally owning all the money in the world; he'll own all the BTC, expecting other people to give him goods and services in exchange for them at a rate of $1B per BTC. And we will all laugh at him, and he won't understand why he's still renting a small cockroach-infested apartment despite being obscenely "rich".
BTW, is the USD or EUR stable? Do I necessarily know that a $5000 paycheck today will enable me to buy a thousand cheeseburgers tomorrow? No, of course not; hyperinflation could hit so hard that I find myself having built an entire website yesterday and only get ten cheeseburgers for my effort (whereas I originally thought I'd do it for the equivalent of a thousand). However, it's extremely unlikely because of the ratio of USD usage in commerce versus speculation. The vast majority of individuals who hold USD right now, do so with the intent of using it to buy stuff at value in exchange for the labor or goods that they've already sold; they're not holding onto USD in the hopes of making USD scarce and therefore increasing their buying power as a side-effect of fluctuation in the transaction medium. The exact opposite is the case with BTC: most of the people who hold BTC right now are hoping that they can induce scarcity, which will allow them to trade it for much, much more labor or goods than they originally acquired it for. This means that, while the arguably biggest obstacle to good faith in the USD is the Federal Reserve, the biggest obstacle to good faith in BTC is every single fellow Bitcoin user. And that's why I'm staying far, far away from this game.
Interesting...
Thanks,
As I posted earlier, I believe you've hit upon Gresham's Observation in economics that “bad money drives out good.” While certainly a likelihood for one reason Bitcoin is increasing in value, I think there are a myriad of reason. One big reason is its utility. There are no middlemen, no large transaction fees, and no limits on amounts sent to anywhere in the world. Transactions are fast, and secure for the most part. If the "Kill Switch" is thrown on the internet, many other process will be impacted, including regular fiat currency transfers.
This high utility value is a big reason to use Bitcoin and not leave it under a mattress speculating it'll increase in value and make you rich. Keep it mind there are at least a half-dozen other crypto-currencies being used. Litecoin is the next most thought of and its system allows for four times the number of Litecoins to Bitcoins.
I agree with your observation: if a currency is stored instead of used, the infrastructure to be able to use it will not develop and become a self-limiting factor in its use and eventual value. While to some extent true, the infrastructure needed to use any crypto-currency is easily implemented and deployed at little cost, maintenance, or expertise required. Your background in IT should tell you that.
This is a new ballgame, how popular it becomes depends upon people, not governments nor its adversarial competition...