Comment Re:What I was waiting for! Best of both worlds! (Score 1) 152
Currencies aren't really backed by anything these days, other than the fact people in certain economic regions generally use a given currency.
All this stuff about governments backing currencies by accepting them as taxes ignores one critical thing: How does the government decide how much to take? Suppose you were in Canada, running a business happened to accept US dollars exclusively from your customers, and at the same time happened to have all your expenses in US dollars. (quite easy to do with an cloud-using internet startup actually) The Canadian government will of course demand you pay your taxes in Canadian dollars, but as for how many Canadian dollars you owe they'll use the exchange rate between CAD and USD.... which is in turn determined by the currency markets, which figure out the price by, guess what, how much people want Canadian dollars vs US dollars.
Now imagine for some reason that every company in Canada becomes such an internet startup overnight. Even though the Canadian government demands that you pay taxes in Canadian dollars, they're going to have to ask how many based on the exchange rate at commercial exchanges. Chances are the value of 1 CAD compared to 1 USD will plummet as soon the only reason you'd want to have Canadian currency is to pay your taxes. Eventually some weird equilibrium will happen where the value is totally determined by how fast the government sells of their Canadian dollars to buy things that the government wants, which means the government might as well just peg the value of the Canadian dollar to the US dollar at some arbitrary multiple.
Of course, this doesn't happen because Canadian companies often want to be paid in Canadian dollars so they can pay their employees and other Canadian expenses. Said Canadian companies often export things to other countries, hence the exchange rate being determined by the supply and demand between Canadian stuff being exported and non-Canadian stuff being imported.
Bitcoin, modulo people holding it due to speculation, acts quite like this sort of thing, except that you can picture Bitcoin as the intermediary between two different currencies. Therefor the exchange rate of Bitcoin is determined by how long it takes to convert from a currency to Bitcoin and back again, times how many people are doing these types of transactions, divided by the total amount of Bitcoin on the market.