Part of the value is in their utility as an anonymous currency: try taxing the guy that's paid in Bitcoins.
Another part is the integrity of the currency: the currency is backed by math, rather than men, and not subject to hyperinflation resulting from corruption (i.e. the US Fed can create money out of thin air, but there is no authority that can create Bitcoins out of thin air: they must be mined).
Meanwhile, I've already discussed Bitcoin's potential as an alternative currency (or lack thereof) in other comments. If people demand Bitcoins as a "tax haven" from the government, then Bitcoins aren't long for this world.
Whatever the mechanism, fiat currencies are subject to inflation through the pressure of an ever-increasing money supply.
>If people demand Bitcoins as a "tax haven" from the government, then Bitcoins aren't long for this world.
It'll be interesting to see how the state tackles this. It'll be easy to drive it underground, but preventing its use will be another matter. Bitcoin transactions through a VPN seem hard to prevent.
As they should be, given that populations increase.
Anyway, even if Bitcoins go underground, they'd have to be priced such that they'd be cheaper than other money laundering channels. Due to their finite supply, though, money laundering through Bitcoins will get very expensive. So their utility re: taxes will be squashed by either the government or the black market.
Is the U.S. Population increasing like this? [1] That's what the U.S. monetary supply looks like.
More correctly, fiat money supply should ideally match total economic output, not population. But the GDP graph also doesn't look anything like that monetary supply graph.
Given this, the BitCoin phenomenon is understandable: savers are looking for a currency that's not subject to manipulation and is most of all predictable in terms of supply. Whether or not it succeeds, I'm glad there's the pressure of a competing, not-centrally-manipulated currency.
[1] http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D...
[1] http://books.google.com/books?id=ZNAhXe2pz1cC&lpg=PA196&...
Read the sentence "Prices might even fall gradually as higher incomes led people to want to hold a large fraction of their wealth in the form of money." Inflation is a Money Supply / Money Demand phenomenon. In the long term, Money Demand tracks real output, but in the short term (such as the recession we're currently in) you can see major swings in demand that counteract what would normally be a quite inflationary money printing exercise.
Huh? [0]
[0] http://www.google.com/publicdata?ds=wb-wdi&met_y=ny_gdp_...
Edits: To make it clear I'm not arguing with the statement that money supply has tracked GDP fairly well until recently. Or that GDP has trended up exponentially.
Yeah, I won't take part except to say (a) you're sampling 4 years of incredibly volatile economic activity, and (b) the other, uh, 96 years exhibit a pretty strong exponential trend.
Imagining a rant, and a classification for the discussion, is not helpful. Your two points (a) and (b) I agree with.
That is only true if T-bills are generated slower than the rise of other money instruments. In the last few years, that has not been the case (and evidence for that is seen in the tanking dollar value compared to any other currency, including gold).
Easy - I collect taxes at the point where physical goods are exchanged for bitcoins or are used to deliver products.
If you can't use bitcoins for food, housing, netaccess, or energy....
Or just collect the taxes at the point where it's converted from BTC to a real, government-backed currency. It's simpler, because there needs to be a paper trail there.
The state does this, but people already get around this by conducting cash transactions. Bitcoin creates another option for this.
Govts tolerate a certain amount of black market because it costs too much to reduce the black market to 0. However, that toleration goes away when govts are seriously hurting for revenue.
...try hiring the guy who is willing to be paid in Bitcoins.
They would tax Bitcoin receipts the same way they tax service-for-service or service-for-property exchanges. The government will calculate the fair market value of the services/property received at $X dollars (based on facts and circumstances such as the amount exchanged in similar cash-based transactions), deem the taxpayer to have received $X in income, and impose a tax of $Y on that deemed income.