There are two reasons to buy bitcoin. Because you hope to sell it later for a higher price or because you can use it as a medium of exchange.
I posed the question on another thread if Bitcoin is actually used as a medium of exchange. The answer would seem to rarely if ever.
The hope to sell later at a higher price has two possible bases, finding a greater fool, always worth a punt, but not really much for rational discussion.
The other possibility is that Bitcoin will become established as a new form of money. If it does it will be radically different from any previous type of money. It seems to me that many of bitcoins supporters do not understand the nature of money. The idea that a currency is controlled by a government or a central bank is often portrayed as a bad thing, whereas that is exactly what gives a currency its value.
A Euro is worth something because the law requires creditors to accept Euro in settlement of debt. This will never happen with bitcoin as no solvent central bank will ever allow something it cannot control to become its currency.
Brendan raises the question elsewhere of all currencies collapsing simultaneously, but this could only happen as a result of some major catastrophe. Tins of beans will be the only currency then.
I agree with most of that
cremeegg. But of course there are notorious instances of fiat currencies losing their value (Weimar, Zimbabwe, Argentina, Russia, Israel, everywhere in the mid part of the last century).
It requires more than simply insisting that suppliers accept the currency; it crucially requires management of the price level. Governments are in prime position to achieve that. The monetary supply these days is delegated to Central Banks who are given mandates. But where governments also have a key role in setting the price level is that they are massive economic agents in their own right. They set the prices of the services they supply and will accept the fiat currency in paying for these services (through taxes of course but in many other ways).
The fiat currency is by far the most efficient medium of exchange. In fact, so far as I can make out, BTC, on the rare occasion that it does act as a medium of exchange for goods and services, is first exchanged for a fiat currency.
As a store of value the fiat currency relies on confidence that the price level will be reasonably stable - a 2% inflation is conventionally regarded as the optimal target to strike a balance between conferring store of value versus hoarding. With these wild swings BTC is a hopeless store of value (I know
fpalb disagrees with me here but I think that is a semantic difference).
So, repeating myself, if BTC is almost negligible as a medium of exchange for goods and services and is hopeless as a store of value then the only thing underpinning the price is the speculative motive. That reminds me of tulips