Bitcoin is a new form of currency that is accepted worldwide and can never be debased by politicians trying to get re‐elected or countries trying to pay off huge debts. In a world in which the value of paper money is constantly ravaged by inflation, that’s a very attractive attribute.
Also, the world is very much ready for a “global” currency. Bitcoin satisfies that need. Bitcoins are like cash in that they aren’t tied to your identity, and transactions made with Bitcoins are irreversible and untraceable. But they’re like credits in a manner that they aren’t physical.
What decides the value of Bitcoin? Supply and demand. Like gold, the amount of Bitcoins is limited ‐ to 21 million bitcoins. The value of Bitcoin is derived the same way the value of gold is calculated.
The whole premise of Bitcoin is that only a finite amount of it will ever be created. This is in stark contrast to standard currencies, the supply of which is continually increased.
The initial growth of the Bitcoin ecosystem and prices were attributed to media hype and more people becoming familiar with bitcoin. The world’s supply of Bitcoins is fixed, but when the global media talks about bitcoin, demand continues rising. This increase in demand (and fixed supply) leads to higher prices—and as prices go up, people who currently hold bitcoin develop greater expectations for the currency. Today, the excitement around Bitcoin is still confined to a tiny segment of the population — technology enthusiasts, monetary idealists and speculators make up a majority of bitcoiners. The potential for bitcoin exposure and price increase is very large.
Like any currency, bitcoin is traded on exchanges. Bitcoin holders hoard their bitcoin, which further reduces supply, which in turn boosts the price and then sparks yet more media attention—and the cycle continues until profit selling takes place like in any other currency.
Bitcoins remain very much a niche payment method. In accepting the currency, there is a small circle of internet companies participating in the ecosystem. This includes WordPress, which will sell you everything from Web hosting to CSS packages in exchange for bitcoins. WikiLeaks and 4chan are part of a growing list of online organizations that accept Bitcoin donations. As vendor acceptance improves, the value of bitcoin as a currency improves.