Bitcoin the currency is simply a digital object. Computer files are digital objects, computer images are digital objects and a bitcoin is another type of digital object. What makes it actually worth some value? Simply the fact that people agree that the bitcoin object is worth value is really all that matter. It’s not that different that those colored pieces of paper in your wallet. I keep a 100,000,000,000,000 (100 Trillion) dollar Zimbabwe note (totally stealing the idea from Gavin Andresen lead bitcoin core developer) that is a very graphic illustration of the fact that paper cash with numbers on it is also an arbitrary value.
The fancy term for regular money is “fiat” cash which means that a government decrees by “fiat” that a particular piece of paper has value. There is no intrinsic value to that piece of paper as opposed to something like a bar of gold which does have intrinsic value and could, for example be reshaped into jewelry, or used as decoration or in electronic parts.
Now that bitcoin has value, as agreed to by many “exchanges”, we can use it to buy things. Bitcoin is still a new concept and most people don’t really understand what it’s all about so in fact most bitcoin’s are simply being held by people in the hope that its value will continue to go up. This tendency to hoard bitcoins is likely a temporary phenomenon until the crazy price fluctuations, the volatility, settles down.
This is still new experimental stuff, and personally I wouldn’t bet my savings on bitcoin just yet. More interesting then bitcoin the currency however is Bitcoin the network and system. The decentralized Bitcoin network ensures that no single organization can control Bitcoin. But more on Bitcoin the network, transactions, multiple signature requirements, anonymity and smart contracts (whew!) in future posts.