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Comment by JonHQ | Hacker News Reader

If you use Bitcoin ONLY as a currency.

The biggest part of the network (imo) is that it is also a payment processing network. You buy something with BTC? You can then repurchase that same amount of BTC with USD.

Or you can hold zero BTC in reserve, and only buy BTC when you need to spend it.

On the merchant side, you can instantly cash out to USD, making it a simple transaction over a payments network, using BTC as a unit of value specifically to transfer.

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I feel like most people do use it as a payments network.

That makes me feel uneasy about the conversion rate of bitcoins to dollars. What is that really based on? The rate doesn't affect people who use it as a transaction network because they cash in / out on demand. So who really sets the price? If mtgox said tomorrow that a bitcoin is worth 1$ or 10,000$ it seems like they would be right.

The bids and offers made in the market set the price, just like all currencies. Right now the market is too small to be stable like most currencies (not enough inertia, too many events if large relative significance, not enough arbitrageurs), but the wild swings you see are not due to the free will whims of the exchange managers, they're due to the market's youth and size.

"That makes me feel uneasy about the conversion rate of bitcoins to dollars. What is that really based on?"

I suspect that it would be based on the number of people trying to use Bitcoin as a payments network at any given time.

If their price was wildly out of with the rest of the market, they'd either run out of bitcoins or out of USD pretty fast.

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