I see several pitfalls in the Bitcoin concept. The big one is the lack of stability in relative value. I have faith in the durability and stability of the BitCoin network in the long run. I'm just wondering how it will surpass the volatility and uncertainty inherent in being tied to an alien market.

Because of the nature of the internet and the way people are using BitCoin right now, we see BTC pegged to the exchanges as the primary measure of value. Currencies should, in my view, be pegged to markets. A set of transactions creates a basis for measuring value. I buy your pizza each week at the rate of 1 BTC per week, and thereby establish the cost of your pizza as 1 BTC and the value of 1 BTC as 1 pizza. The value of the BTC is defined by the pizza market. The pizza market, of course, is going to be valued differently by different currencies, thereby defining the rates of exchange for all three.

The problem with the BTC exchanges is the fact that they abstract the currency away from its native market. This means that the BitCoin value is being governed by the market of another currency... currently, I believe, the USD. It's not being measured in pizzas or gold or hours worked. It's being measured in "how many suckers can I get to sell at $.5 and buy at $10."

Obviously this will change over time as more people begin to use BitCoin and more wealth is defined in terms of its value in the BitCoin network. The problem is, how do you get through the USD-BTC interregnum?

To put it simply, why would anyone use BTC as a currency when it's currently in the role of a commodity? If someone does, they will probably lose out on the value of their bitcoins as a commodity, even if the price is fair relative to the exchange rates at the time. That's a negative experience likely to be encountered by a majority of users until BTC stabilizes.

The second aspect is this: why would anyone ever stop using bitcoins as a commodity? Right now, it's a measure of how much the speculators are gambling, rather than a measure of value related to commerce. The BTC network needs to determine its own market value, rather than tuning in to alien markets.

Is there a way to manage valuation of bitcoins in a measured, predictable way?

The only solution I see is to somehow draw out transactions over a period of time, during which changes in value (either in pizza ingredients or BTC valuation) are averaged or mitigated somehow, resulting in a fair exchange of value... I get good pizza at a fair rate, you get a fair profit, even if the exchange rate goes nuts.

The point of this all is: buying a pizza for 10000 bitcoins is absolutely nuts when just a little while later bitcoins are valued at over $10USD. Unless that pizza is made of tiger meat pepperoni and the tears of angels, there was definitely a huge disparity in the exchange, and this disparity is a major pitfall for the Bitcoin network as a whole.

Bitcoins have intrinsic value. They're secure, pseudo-anonymous, and convenient. You aren't paying a middleman, you aren't gambling that the buyer's payment might get refunded and you'll never see your product or your money ever again. The features built into the system speak for themselves.

I think that those things create value, and alongside the cost to produce, with a healthy (bitcoin) market, should combine to create a conventional BTC value outside of its relationship to the USD or other traded currencies.