Gold was chosen as a type of money in ancient times because it was rare, was soft enough that it could be divided and coined, but durable enough to be handled without a lot of wear. These same attributes are also why the rich used the material as jewelry which also contributed to the desire for obtaining it.
The first person who adds "value" to a rock of gold is the miner. He toils away each day, investing time, energy, resources and equipment to dig this stuff out of a mine. It's hard work, and for those days of work the miner expects to be compensated. The next person to project even more value to the gold is the coinsmith. She (for gender balance) spends time, energy, resources and equipment to design, purify, melt, mold and polish the metal until it becomes a work of art that represents the pride and purity of her product.
Because the people in the surrounding economy understand the great energy that has gone into the process of these coins so far, and that the businesses that supply the necessary materials that support the mining and coining industry all accepts the gold coins as valuable, everyone begins to have faith that these coins can be traded for other goods and services. The miller trades his flour, that he has worked so hard to produce, for these gold coins. He projects a certain labor value to the coin. Do you think he would trade that coin for meat that is less than the sweat he has poured into it? No. And the butcher would not trade his precious animals and labor for an amount of coinage that didn't represent them. By the time the gold has achieved this level of projected wealth, it is likely that the trend will continue because the people have exchanged so much labor to obtain them that they would rather see that value maintained or increased rather than devalued. As the coins become more scarce, their value will naturally increase and their purchasing power will also increase. The once nearly worthless rock, now represents great value.
So, how and why would anyone perceive a bitcoin to be of real value? Why would anyone trade real goods and services for data? Why would anyone trade hard earned money to buy intangible electronic nothingness? Now that you understand the origin of gold-as-money you will more easily understand how a bitcoin gains its projected value and why millionaire investors The Winklevoss Twins claim that Bitcoin is Gold 2.0. and have bought millions in Bitcoin themselves.
Like Gold, a bitcoin is at first, hidden deep in the code. To extract it, one must invest in significant computing hardware and a lot of electricity. These resources are used to crunch the complex equations that help the network function. As a reward for the miners expenses, the program gives the miner a new bitcoin. The bitcoin miner now projects value to this digital thing equivalent to his investment. The program only has a limited amount of bitcoin to be mined (22 million total) and the program make them harder and harder to mine as more are pulled out of the system. So a bitcoin miner must invest in even more hardware and more electricity. His friends think this is a cool idea but they don't want to invest in the expensive hardware. Instead they buy his bitcoin for some regular money. This is a hassle, so some techy guys build a website to help make these money-to-bitcoin transactions easier. People discover that with these websites they can transfer large amounts of money across the world in seconds with no third party expenses. The idea builds and more and more people see the value in this system. A community of users and developers builds around it, each projecting labor value to the bitcoin. Small businesses begin accepting Bitcoin as a way to attract new clients and customers from this community. The demand for Bitcoin grows, but because the limited supply of Bitcoin, the price to buy one increases. People now see that Bitcoin is also a good investment. Even more people buy into the system, paying with money that they worked hard to earn. I paid $500 for 1 Bitcoin last week. There is no way that I want to see that $500 bitcoin lose that value. I'm totally invested in maintaining or increasing that projected $500 value and so are millions of others.
This morning, November 22, 2013, A record amount of bitcoin (the value of $146 MILLION) was transferred from China to Africa in one transaction! (The cost of the transaction was a whopping 47 cents!) Obviously there are some big players in the game now. Don't you think these Africans are fully invested in the value of Bitcoin now? Heck yes!!!
Bitcoin is now valuable money!
The more I learn about Bitcoin the more I see the genius of it. I'm convinced that the development and growth of the Bitcoin community is one of the most exciting things since the internet itself. Although crypto-currencies are a new and risky experiment, the idea that consumers and businesses can trade freely without interference from the leaches of central banks and the violence of governments is an idea worth investing in. Take a little risk for the ideas of freedom. This is the true value of Bitcoin.
Also Read: How To Get Started With Bitcoin