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I've often heard that the US Dollar gets its value in part because it is the only thing you can use to pay taxes. And even if only a small percentage of US Dol

I've often heard that the US Dollar gets its value in part because it is the only thing you can use to pay taxes. And even if only a small percentage of US Dollars is used to pay taxes, that is enough to drive the rest of the value. When someone gets hit with a crypto virus, if they don't have backups then the only way of getting their data back is to pay the ransom using cryptocurrency. And participation in black markets is based on the same. So even if that is overall only a small percentage of the use of cryptocurrency, it should be enough to drive at least part of its ongoing value. So my question is, does this idea (or either idea) have any merit?

ellius 9y ago
It does. Another alternative is that nation states “impart” some of their fiat value because they will potentially subsidize some speculative activity if the whole thing implodes via consumer protections or whatever. The thing that is interesting about Bitcoin is that it holds up a mirror to the largely illusory nature of “value” and money, which are sort of a shared mass illusion anyway. But it’s certainly different than the dollar insofar as fiat currencies are backed up by all of the powers of a state: as you mentioned the power to compel tax payments, and also the power to allow transactions within their borders etc. Fiat money in some sense is an embodiment of the power of the entity that issues it. Bitcoin has no power backing it, so its value, if it has any, has to come from something else.
kelnos 9y ago
I think that people who suggest that are missing the point. Yes, the USD derives some of its usefulness from the fact that you have to pay US taxes in it, but there are other things, like that it's a currency backed by a major world power, and that so many sellers accept it as payment. But that doesn't mean that there are other reasons a currency is useful. In the end it mainly boils down to network effects: if a lot of people accept a particular currency, then it's useful. There are also other properties that make it useful, like relative stability of value and easy/cost of use (Bitcoin falls down pretty hard on both metrics). Bitcoin perhaps has some other properties (that the USD does not have) that make it attractive, but at present it doesn't appear to be enough to make it a particularly relevant currency when it comes to actual economic activity. Taxes are important, though: people need to feel like they can reliably, safely, affordably, and stably convert a particular currency into the currency they use to pay taxes. I'm not sure Bitcoin does a great job by that metric either. Right now the #1 use of cryptocurrency seems to be speculation, and #2 is far, far, far behind on the list.

ellius 9y ago

It does. Another alternative is that nation states “impart” some of their fiat value because they will potentially subsidize some speculative activity if the whole thing implodes via consumer protections or whatever. The thing that is interesting about Bitcoin is that it holds up a mirror to the largely illusory nature of “value” and money, which are sort of a shared mass illusion anyway. But it’s certainly different than the dollar insofar as fiat currencies are backed up by all of the powers of a state: as you mentioned the power to compel tax payments, and also the power to allow transactions within their borders etc. Fiat money in some sense is an embodiment of the power of the entity that issues it. Bitcoin has no power backing it, so its value, if it has any, has to come from something else.

kelnos 9y ago

I think that people who suggest that are missing the point. Yes, the USD derives some of its usefulness from the fact that you have to pay US taxes in it, but there are other things, like that it's a currency backed by a major world power, and that so many sellers accept it as payment. But that doesn't mean that there are other reasons a currency is useful. In the end it mainly boils down to network effects: if a lot of people accept a particular currency, then it's useful. There are also other properties that make it useful, like relative stability of value and easy/cost of use (Bitcoin falls down pretty hard on both metrics). Bitcoin perhaps has some other properties (that the USD does not have) that make it attractive, but at present it doesn't appear to be enough to make it a particularly relevant currency when it comes to actual economic activity. Taxes are important, though: people need to feel like they can reliably, safely, affordably, and stably convert a particular currency into the currency they use to pay taxes. I'm not sure Bitcoin does a great job by that metric either. Right now the #1 use of cryptocurrency seems to be speculation, and #2 is far, far, far behind on the list.