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Nothing stops them from doing that. It's already been done a few times, in fact.

What generally prevents tons of fracturing is the same thing that always has for currencies with no backing- perceived value of the currency. Your bitcoins are only worth what other people think they are worth.




"What generally prevents tons of fracturing is the same thing that always has- perceived value of the currency."

Except that "perceived value" is not what prevents fiat currencies from fracturing. A government could, at any time, issue a new currency that competes with or replaces its old one. The reason governments almost never do this is that it amounts to defaulting on a loan, at a fundamental level.

To put it another way, if a government decides to issue some new, incompatible currency, and whatever currency you had previously lost some or all of its value, would you trust that the new currency would not also be replaced by yet another currency later on?

Money does not just magically get its value; the "perception" that money has value is, like the perception that anything else has value, based on supply and demand. We are all familiar with the money supply; money demand is generally driven by the legal structure that surrounds that money. Money demand comes from things like tax codes, debt/bankruptcy laws, torts (which often deal in monetary terms when speaking of damages), civil fines, etc. Another way to look at it is that laws allow you to use money to cancel debts of some kind, and thus the demand for money can be traced to the need people have to cancel various debts (and thus people with no debt can trade money for the goods or services of people who must cancel some debt).

Bitcoin is unique in having no legal structure surrounding it, and its demand comes principally from technical features (primarily one feature, which is secure online payments). Unsurprisingly, this demand does little to help Bitcoin survive on its own, hence the overwhelming important of Bitcoin exchanges (were these to vanish, Bitcoin would die overnight; on the other hand, the Ruble had some value in Russia even during the period of time when it lacked easy convertibility with other currencies).

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To put it another way, if a government decides to issue some new, incompatible currency, and whatever currency you had previously lost some or all of its value, would you trust that the new currency would not also be replaced by yet another currency later on?

And that's not just a hypothetical, as it's precisely what happened with the Myanma (Burmese) kyat:

http://en.wikipedia.org/wiki/Myanma_kyat#Banknotes ("Third kyat" onwards)

Multiple times, in fact, eventually leading to this:

http://en.wikipedia.org/wiki/8888_Uprising

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Perhaps the initial demand for something like USD was due to legal effects like tax codes and bankruptcy laws, but I would think the primary demand today is network-effects. If I want to participate in a transaction within the US borders, almost any transaction, I must use USD. Therefore I need USD. Most of my transactions have nothing to do with said legal structures.

I think it's hard to say that Bitcoin's demand principally comes from technical features (without proof). Certainly there are those that want secure online payments and so buy BTC but there are others that buy BTC because they think it will be more valuable in the future (relative to USD) if it gains more traction. Additional demand: low transaction costs for international exchange (I remember reading an article about Iranian nationals using BTC to sidestep export/import restrictions).

But I definitely share the frustration of explaining perceived value. From an economics stand-point, "perceived value" is redundant. Value is by definition an abstract concept that humans (or other creatures) attach to something based on how much they desire it.

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"Perhaps the initial demand for something like USD was due to legal effects like tax codes and bankruptcy laws, but I would think the primary demand today is network-effects"

Those network effects start somewhere, in the present; otherwise, it would be hard to explain why US dollars are hard to spend in Canada, Europe, and other countries. The answer is that in Canada, the Canadian dollar can legally cancel debts; in Europe, Euros and the remaining national currencies do it; other countries have their own currencies, or adopt the currencies of more powerful nations like the United States.

Laws about money remain the driving force of the demand for money. Failure to pay taxes is a serious crime; the US government only accepts US dollars for tax purposes. Failure to repay a private loan can result in your property being given to the lender -- and you could be arrested for trying to keep that property (formerly yours). These are legal matters that affect our daily lives, even if we do not actively think about them, and the demand for US dollars in the US, Canadian dollars in Canada, and Euros in Europe follows. If you want to be a law-abiding citizen or business in the US, you must get your hands on enough US money to at least pay your taxes; even if you participate in a barter exchange, the law requires you to pay taxes on that trade. Even if your plan is to live off the land, you will still have to pay Uncle Sam at some point: hunting and trapping fees, fishing fees, fees for felling trees, etc. Other countries have similar fees and taxes, except that the requirements are for a different currency. Network effects are secondary: People know there is demand for US dollars in the US and in a few other countries, and so they may deal in US dollars even if they have no debts in US, much like a shopkeeper will buy and sell goods he may not have personal use for.

"I think it's hard to say that Bitcoin's demand principally comes from technical features (without proof)."

Can you point to any other sources of demand? There are no laws about Bitcoin; if you issue a Bitcoin loan to me and I fail to repay it, what are you going to do? Even if you took me to court, the first thing the judge would do is to convert whatever Bitcoin amount you name to the currency of your country. No country will accept Bitcoin for tax purposes. Those reasons alone are enough to conclude that without Bitcoin exchanges, Bitcoin would probably not survive at all -- merchants will only accept Bitcoin because they are aware of a way to trade Bitcoin for their country's currency (and the lack of stability in the exchange rate really puts a damper on that). Even people who use Bitcoin for black market transactions rely on the existence of Bitcoin exchanges.

There is no denying that there is demand for Bitcoin's technical features. People want a way to make secure, peer-to-peer online payments, and they are not satisfied with solutions that rely on trusted third parties. It seems that all other demand for Bitcoin stems from this; speculators are basing their Bitcoin investments on the belief that there is some real demand for Bitcoin and that the Bitcoin market will grow, but were there no demand for Bitcoin those speculators would not be in business (speculation does not create a market). The low transactions fees for international exchange are a product of lacking third parties, and I would classify that as a technical feature of any digital cash system.

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I'm interested in your third paragraph, particularly "Money demand comes from things like tax codes, debt/bankruptcy laws, torts, ...civil fines, etc."

In prison, packs of cigarettes are money and none of the things you mentioned exist. Yet in a prison I can trade a pack of smokes for a tattoo, drugs, cellphones, etc. It seems like money arises out of the need to have a reliable, constant value for exchanging good and services.

Do you differentiate between money and currency(medium of exchange)?

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Prison has a lot of structure, in the form of laws,customs,and constraints imposed from without and from within. The role of money in expressing the power of the state may be distinguishable from its role as a medium of trade, but I think if anything the prison example contradicts the point you seemed to be making.

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Fair point, I meant it in that prison officials don't issue the currency and in fact they actively discourage trade among prisoners. betterunix makes it seems like the state and money are essential for each others existence.

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I'm not sure if there is a difference between currency and money, but there is a difference between fiat and non-fiat currencies. Cigarettes are not a fiat currency; they have inherent demand because they can be smoked.

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