The currency obviously has been given it's value somehow. I know it is preached to be different than regular fiat currency, but I am very curios how it went from an idea to now being able to be used for purchases, and given a value in relation to USD.
Me and a group of friends cannot come up with an idea for something to be used for transactions and then have that idea be able to transform into a countries currency. We can trade amongst ourselves but there is no way we can give it a value to be used to trade it into dollars. There has to be some type of government involvement in order for bitcoin to have a value in relation to a nations currency.
My question is how is the original concept of bitcoin given a value in dollars? Does this mean there is significant government involvement in bitcoin?
Things are given value simply on Supply/Demand. First, people are taking a risk that Bitcoin will maintain any value at all by accepting it as a form of payment.
However, once we get past that, individuals are simply saying I value this product I'm producing at such a price and a certain amount of other people will value it at the same arbitrary price. At that price you have an equilibrium and enough people to institute a trade of bitcoin (or any other currency) for the product.
The difference between BitCoin and USD (for example) is BitCoin's "printing press" will eventually be turned off. That's built into the way the system works. USD (or another countries currency) on the other hand has no control on having the printing press turned off, other than the government arbitrarily determining to stop printing.
There's no government involvement backing up the value of bitcoin. In part, the exchange rate is driven by the amount of people using BitCoin, with the express knowledge that the printing press will be turned off eventually. And in another part with the way other currency values and commodity prices move relative to one another. People can freely exchange and trade currencies on the FOREX market. You have free markets determining the values of currencies relative to one another.
Honestly, I'm trying to explain something far to complex to state as clearly as possible. And I am in no way an expert on currency markets or the like. I'm just a business management major that's taken macroeconomics and microeconomics. The valuing of a currency has many constantly moving, complex parts. I think you head would explode at the first watching of a business network segment on currency trading.
Here's a CNBC video for example:
http://www.youtube.com/watch?v=wSodzBHN7Y4Interesting. Why does there have to be a cap? Is it possibly that bitcoin is being used as a test for a possible Global Currency? Is it possible for the Cap to come off? If it doesn't come off, is it just a precursor to a bitcoin alternative that is uncapped?
It seems that bitcoin would blow all other forms of payment out of the water uncapped. If it's capped, then the price would skyrocket when it comes to an end (and near the end), especially if it's widely accepted. So it's either going to become more and more extinct when it comes near the 21 million mark or its going to skyrocket and be a hotly traded commodity in the next 10-20 years.
It's almost like everyone should be buying as much bitcoin now while the price is so low especially as bitcoin becomes more and more widely accepted.