However, since miners will no longer be rewarded with "new" Bitcoins, presumably the transaction fees will significantly increase?

Maybe, OR they will tail off. New bitcoins slowly reduced, and replaced by transaction fees.

So is it a good speculative investment, and if so, hos do you invest in them?

well the price has jumped in recent months, i'm not sure that the current value will hold.

And i think mtgox is the biggest exchange, i'm sure you can buy with USD there.

There is currently speculation about the value based on US plans to regulate (or ban) bitcoins - lending them legitimacy would likely increase trade and push the value up; but lots of speculative investment now has pushed up the price, doubling in 7 days... (i recall when a bitcoin was worth about 35$, it's now over a thousand...)

I heard a news story about two weeks ago that somebody had filed with the SEC or something to put together a bitcoin fund - don't know what came of it.

You will find out that it's another speculative bubble and the early ones got out at the top converting their holdings into real currency. All that will be left are new comers and drug dealers using bitcoins to transfer profits from their illegal deals to safe havens.

The US government will do everything in its power to shut down bitcoins.

This is how you mine bitcoins: http://i.imgur.com/pt4vx.png
This is what happens when the bitcoins run out: http://www.youtube.com/watch?v=8aeAarX-Q24

Once the milestone is reached, bitcoin's inherently deflationary nature will only be more pronounced. While the product of world economy will continue to grow, the supply of bitcoins will stay the same so its purchasing power will increase. This should be the main rational driver behind its value in business-per-usual case but right now, the skyrocketing stems from the network effect - bitcoin is not yet a legal tender anywhere, so its position as a full-fledged currency has not been thoroughly established. RIght now, the price is in self-reinforcing loop - the more people buy it, the higher its usability as a mean of exchange and the higher the motivation to buy it. That doesn't mean it won't see its fair share of price falls along the road but in the long run, its price should be increasing naturally if we believe in the world economy growing and moreso than the price of regular currencies like the USD.

"The US government will do everything in its power to shut down bitcoins."

Well, the US government will never do anything to increase the freedom of competition in the vein of the Austrian school, so their witchhunt logical. Especially when it comes to currency, without the hegemony of the USD as the reserve currency of the world, the superpower position of the US would crumble - it would have to start repaying its debts, for instance, and its ability to maintain the extent of the armed forces would suffer immediately. Not that bitcoin will be the currency to dethrone the USD but once the concept of electronic currency sticks on, there might be other designs going on. A simple modification to the SDR could mean problems for the USD (which is the reason why China lobbies for the SDR of course).

'bitcoin is not yet a legal tender anywhere, so its position as a full-fledged currency has not been thoroughly established. '

what difference does that make? Legal tender is just the backing of a country, any company which offers services in the currency offers it's backing, and enough companies providing a wide enough range of services will eventually guarantee that users have the utility for them to trust the currency.

You don't need to be 'legal tender' to develop the trust required for a 'full-fledged' currency. (though it helps, i'm sure bitcoin doesn't want this kind of help, and prefer's it's independence)

It makes a difference when you try to pay with the currency. Sure you may pay anyone in bitcoins if they agree with it, but being a legal tender means they have to accept it. Not being a legal tender means you will most likely have to exchange your bitcoins for the local legal tender if you tried to pay with it, since it's more ergonomic for the other party to get compensated in their everyday legal tender. Unless you want to shop exclusively online in bitcoin-accepting shops, everyday usage of bitcoin will be a bit limited in foreseeable future. Only if the economies underwent bitcoinization, an everyday usage of bitcoin alongside the local legal tender, would the legal status of bitcoin become meaningless. But that's quite a tall feat, even the most pervasive currencies like the USD and Euro cannot to used to pay everywhere. So until then, being an accepted legal tender would heavily facilitate the penetration of bitcoin into the population of the accepting country.

You haven't replied to my point. For a currency to hold value people must trust it. getting 'Legal status' is a sufficient criteria, in most cases, but it is not necessary.

The vast majority of people do not know how money works or where it comes from. Those are the kind of people that need a strong reassurance to accept bitcoin as a meaningful currency. Having the possibility to repay their obligations in bitcoin goes a long way in giving them just that. Even though in the end it just means the people would rely on the government promise of accepting bitcoin as a mean of paying taxes, this concept of fiat money has been going on for decades and no one seriously complains. Whether a currency is "full-fledged" (I should've chosen a different word I guess) or not is just a matter of public perception but right now, being a legal tender somewhere is a standard. In yesteryear, the standard was convertibility to gold. Standards change, today's USD wouldn't be a full-fledged currency during the Gold Standard. Until the standards change this time, doubts about bitcoin will go on.

All it would take to constructively kill Bitcoins is to make it illegal to convert them to dollars. That would happen as soon as it looks like Bitcoins really could be a viable alternative to traditional currencies. Without a legitimate way to enter the world economy they'd remain the province of drug dealers and money launderers.

Of course, the United States government might not even have to bother if Bitcoin is a bubble.

@invictus - making it illegal to convert bit coins to USD would affect the value slightly. But if it were made illegal then people would convert bit coins to euros and then into USDs. Unless the whole world makes it illegal to convert to their currency bit coins will live on. Also in a sense when you convert bit coins to usd all you are doing is selling a bitcoin. How do you make it illegal to buy things?

@ ulytau: "Sure you may pay anyone in bitcoins if they agree with it, but being a legal tender means they have to accept it."

You're mistaken. That is a myth. A popular myth, but a myth nonetheless. The Bank of England issues notes up to £50 in value, for example, and the £50 note is legal tender, but shopkeepers are quite within their rights if they decide to refuse payment in £50 notes. The weight of the term "legal tender" in establishing the legal acceptability of a currency is an oft-overstated myth.

"Legal tender" is a term which has a very narrowly-defined legal status, relating only to the final settlement of debts - it has no relevance in terms of everyday purchases.

"making it illegal to convert bit coins to USD would affect the value slightly. "

I think it would burst the speculative bubble, causing the price to fall resulting in panic selling, ultimately wiping out the value of bitcoins altogether.

'being a legal tender somewhere is a standard. In yesteryear, the standard was convertibility to gold. Standards change, today's USD wouldn't be a full-fledged currency during the Gold Standard. Until the standards change this time, doubts about bitcoin will go on.'

And that point about changing standards is exactly what bitcoin is doing. It is creating an alternative which couldn't exist without the internet economy and technology upon which bitcoin is built.

I somehow doubt that bitcoin will be able to go back in time and fulfill the standards of an earlier time, I also don't think it needs to. As an invention it is breaking new ground. It may fail at the first attempt, but it will not fail because it attempted to be something it's not.

""Legal tender" is a term which has a very narrowly-defined legal status, relating only to the final settlement of debts - it has no relevance in terms of everyday purchases."

While your objection is correct, I don't it is not very relevant counterpoint to the usefulness of legal tender. Settling multibillion financial obligations (a daily occurence among economic agents that matter) is more important than whether some shopkeeper accepts your £50 note when you buy one sandwich. The specifics are also an institutional thing that differs in every country, you can pay with any banknote in the Czech Republic, for instance. Plus if you tried to pay with your pound-laden credit card, you wouldn't have to worry about the denomination of your physical money (and don't expect you could pay with bitcoin if the shop isn't even equipped for card transactions). The situations where you couldn't pay with your national currency in your country to a resident are outliers that exist, but most people might not even ever encouter them.

"And that point about changing standards is exactly what bitcoin is doing."

Changing standards - sure. Changing standards for "full-fledged" currencies - no. Bitcoins only advantage in comparison to established currencies is its suitability for storing value via its limited supply preventing any "quantitative easening" scenarios. Otherwise, it would make for an awkward main currency, just like Linux would be an awkward dominant operating system. That will be a job for other electronic currencies that will together make a new mix of currencies, each specialized in fulfilling different functions of money.

What is 'full-fledged' is just defined by use. If bitcoin changes what is the most useful method of exchange it will become dominate over real-space alternatives.

Most legacy currencies have electronic transfers, but they are patched onto the physical currency. Bitcoin cuts the strings AND does e-currency better than anyone else. So for this one type of transaction, it is superior - so when is electronic transaction going to be the new standard? Or is it already a huge percentage of all transactions?

"If bitcoin changes what is the most useful method of exchange it will become dominate over real-space alternatives. "

You are missing the point. Bitcoin is a worse alternative to "legacy" currencies as a main currency because it is worse equipped to play the roles of mean of exchange and numeraire than them - its supply is fixed and its value will tend to naturally grow. Ideal mean of exchange changes its supply based on the product of the economy and ideal numeraire has a constant value so it can accurately reflect prices in the economy. Bitcoin's niche is in its ability to store value because of its supply. It has no comparative advantage in being a main currency.

@Maniac You said "But if it were made illegal then people would convert bit coins to euros and then into USDs"

Certainly people *could*, but *would* they in sufficient numbers to make bitcoin viable? That's the real question and it's harder to answer.

The universe will die

I was talking about the advantage of electronic exchange, security, de-centralised control (ie placing the trust in a algorithm rather than a human who can be corrupted)

Of course credit card companies can offer a lot of there advantages, but only as a service which you must pay for. You can run bitcoin software and exchange through your digital wallet without a middleman; though of course you need to buy/earn bitcoins in the first place, which currently often invovles selling USD to an exchange - though I can easily imagine earning my own bitcoins rather than buying them...

The problem with earning bitcoins is their ever changing value. What is minimum wage in bitcoins today may be a fortune tomorrow and may be below poverty the next day. So when I negotiate a job with a client, how am I supposed to negotiate a rate in bitcoins?

You could still ask an amount of bitcoins that equals a set amount of dollars, but I suppose that kind of defeats the point...

'The problem with earning bitcoins is their ever changing value.' - only compared with other currencies...

The point, Ora, is for a currency to be viable, it must be moderately stable with small fluctuations, not stock market IPO like fluctuations. When I negotiate a rate of 1 bit coin per day (because it is at say $1000 equivalent) and then by then end of the week it is either $2000 or only $500, that is too much variance for long term contracts and employment. Selling a one time good or service like a car or tickets to a concert, the price can change from day to day, but not on long term contracts or half now half on completion deals. A contractor gives you an estimate good for 30days, but the value of the bit coin triples or nose dives in that time. You go to get competing estimates but three days apart males those estimates completely unrelated. Stability is needed and bitcoins don't have it.