Man Buys $27 Of Bitcoin, Forgets About Them, Finds They're Now Worth $886k | Technology | Theguardian.com / quote 3 of 5
Bitcoin's value comes from scarcity
One one level it's basic economics; if there is a demand for something and it is scarce it's price goes up, the scarcer it gets the more it's value increases. With bitcoin the scarcity is created by any user downloading software that will give the computer a unique problem to work on, when it's done you get bitcoin. However electricity and hardware prices limit this, unless the market demand for bitcoin increases it's value further. This calculation/scarcity mechanism should prevent inflation. Bitcoin transactions are conducted not through a central bank but peer-to-peer, you exchange a public record that runs on everyones computers that has downloaded the software. So you go to Mt Gox, exchange sterling for bitcoin then that transaction is logged on the public record, you then transfer the bitcoin onto an online wallet or a wallet on your own computer that the software can run and update, but you could easily have transferred that bitcoin to a merchant, all that's known is a value and unique wallet address. That's were it becomes harder to trace. To exchange it back you can go to trader website or other exchanges and look at their rates and they will credit your account. Simples.