Below is a comment I posted on Michael Krieger’s blog regarding the intrinsic value of bitcoins.

Bitcoin, like gold and silver, is backed by labor (energy, really, when you get down to it). As in mining for gold or silver, there is a labor/energy cost to produce bitcoins. Like gold and silver and dollars and euros and every other currency or form of money in the history of humans, there is absolutely zero intrinsic value to them other than the usefulness that they have to humans.

The problem with fiat currency is not that it is fiat. Any form of money, whether hard or fiat, can work fine as long as there is nobody destroying the value of the currency by producing it without cost. The problem with the dollar is not that it is made of paper. The problem is that the Fed can create new dollars in any amount at any time with no effort (i.e. backed by no labor/energy cost). The dollars created thereby thus have no value backing them.

Gold is just shiny metal. It’s beautiful, but so are flowers. Gold has value simply because humans value it (note that flowers also have SOME value, though they are not generally used to transact with). Gold RETAINS value because there is no way to produce it without cost (labor).

Bitcoins also require cost to produce them. And furthermore, like gold, built into the technical foundation of their production, there is an absolute limit to the number of bitcoins that can ever be produced. If the bitcoin experiment is not destroyed by government meddling or by a loss of confidence (say due to the discovery of a flaw in the foundational algorithms), bitcoins will retain their value specifically because there is no way to produce bitcoins without cost. There is no equivalent to the Fed in the bitcoin universe. The only way to produce bitcoins is by “mining” them, which costs significant effort (value, labor, money, energy, whatever unit you want to measure it in) in electricity and computer processing time.

All money is ultimately a representation of energy. Good money is money that cannot be diluted (counterfeited) by the costless production of more representation than that which is represented.