I agree with Joseph that, ultimately, all paper currencies are truly a
pyramid scheme of sorts. It came as a surprise to me when I recently heard
that if we gather all the dollar bills and coins scattered throughout the
world (not just the US, the world) and distribute it among US residents
equally, each one of us would have a total of... about 3,800 dollars in
our pockets! In other words, it's not only that paper money is just as
valuable as people are willing to accept it, but rather that these days
"money" is not even paper money. Our "real currencies" are nothing but an
officially sanctioned type of bitcoin. It all exists on the ledgers,
databases... and it will be good for as long as we all accept it as
"money". That was the great economic invention that happened in (roughly)
16th century Europe and gave birth to the era of capitalism, and one of
the reasons why I dislike the label "free market economy" to refer to our
current economic system. It confuses more than it clarifies. There were
also free markets under the slavery and feudal systems. Just visit the
ruins of Pompeii and check out their main square. Markets were not
invented recently. Neither was money. However, capital was. That's what
identifies our current economic system, to the point that everything
revolves around it, even if it has no material form whatsoever.

Incidentally, since the term "pyramid scheme" was mentioned, one should
bear in mind that the Federal Reserve has been printing money for over a
year at a rate of 85 billion a month. It's the so-called "quantitative
easing". They have been doing so as a political measure, and not to back
up any real wealth that was created. It's just the nature of things. It's
the identifying feature of today's economy, and its main attributes
(fluidity, flexibility, mobility...) are also spreading to all other
spheres of life. It's not a coincidence that, in a world so clearly
centered around this concept of "ethereal money", all those other
qualities are constantly promoted as "in", "with the times" or even
"good". 

Said all that, I agree that the bitcoin market will sooner or later
collapse. However, I don't predict anything different for the officially
sanctioned money markets either. Actually, this is precisely the reason
why we have bubbles. It's intrinsic to the system itself. It cannot be
otherwise.

================================================================

I think we may have been mixing up two different aspects of money here.
Joseph's original point was that some article was pointing out how bitcoins
only have value "because enough people believe they do", and he said that
the same could be said of any other currency. I agree, but that is not to
say that I think it's wise to invest in bitcoins.

Let's see. On the one hand, we have the concept of money, which is
basically a medium of exchange accepted to trade goods and services (yes,
it has become more and more complex over time, and we can add more
features, but that still remains its main function). As long as there is a
group of people that does accept bitcoins as a medium of exchange to trade
goods and services (and that appears to be the case, at least so far),
then it is a form of money. The comparison with beanie babies or baseball
cards does not apply. People do *not* use beanie babies or baseball cards
as a medium of exchange to purchase other goods or services. You don't see
prices for goods and services in beanie babies or baseball cards. On the
contrary, people purchase beanie babies and baseball cards (more often
than not using a currency, which is acting as a unit of exchange) either
because they enjoy them or (more likely) as an investment because they
think they may be able to resell them in the future at a higher price.
Bitcoins, on the other hand, are indeed used to pay for goods and
services. That is a key difference. And when people use bitcoins in that
manner, they are indeed using it as a currency. Now, the community that is
willing to accept them may be larger or smaller, but it does function in
that way. There are currencies in the world that are legal tender in small
countries and are used by very small amounts of people, but they are still
currencies. What makes it a currency is not the amount of people who use
it, but rather its function. Yet, obviously, not all currencies are the
same. Some are more useful than others. Some can be exchanged with far
many more people than others. Still, we'd then be talking about the value
of the currency, and not whether or not it is a currency. 

Joseph points out that "normal currency" is also valuable because it is
accepted by other people. Indeed. There are numerous examples in History
too. To use an example that hits home in my case, when Franco won the
Spanish Civil War on April 1st, 1939, the currency minted by the
Government of the Spanish Second Republic became practically worthless. It
was still used by a small amount of people who went into exile, and the
Spanish Government in exile continued using it for a period of time, but
its value was quite limited. Yet, notice that it still had some limited
value to those people who were in exile, especially as long as there was a
chance that, depending on the fortunes of the Allies in WWII, the
Government in exile might return to Spain. In other words, once again, the
value of the currency was higher or lower but, as long as a group of
people continue using it and accepting it in exchange for goods and
services, it continued being currency (even though the amount of people
who used it was perhaps even smaller than the amount of people using
bitcoins today).

So, do we have grounds to believe that bitcoins will continue being used
by a widespread community in exchange for goods and services in the
future? I have my doubts. In general, having the backing of a legitimate
Government is key when it comes to currencies. It's precisely what
guarantees that you will be able to use it in a large community for a long
period of time (i.e., it provides the credibility and the stability),
which makes it far more valuable. Not sure I share all that libertarian
excitement about self-managed virtual communities that come out of nowhere
and manage to set up a political and economic legitimacy of their own. 

But then we have a second aspect of currencies, which is that they
themselves can be exchanged. In that sense, what Ross mentioned about the
"pyramid scheme" (i.e., that in order for the price to continue going up
you will need more and more people coming into the market and purchasing
them) completely applies. However, notice that that also applies to any
other form of speculative investment (e.g., for as long as more and more
people continue showing interest in beanie babies, their price will go up,
but the market will collapse the moment people just bail out).