Bitcoins have no intrinsic value. They only have value in trade.

If I started my own currency called a superdollar, and I had the only superdollar in existence, it would be worthless, despite the fact that it was very rare.

If a foreign entity can make the bitcoins you have disappear, that leads to less confidence in your ability to use the bitcoins for trade. The fact that there's fewer out there doesn't mean yours are more valuable. The number of bitcoins has been constantly increasing, yet the price has been going steadily up as well. That's because they've become more trusted, more usable. More places will accept them in trade, and more exchanges exist.

When places like Mt. Gox fail, or fear that foreign entities have the ability to essentially rob the banks with impunity, it makes the currency less trusted.

Consider this. The government issues a currency called digibux. They are matched to the USD, you can buy one digibuck for 1 USD, but they are limited in volume, only so many are offered. Looking at this naively, digibux has the same value as USD. Now consider the following happens, the government takes down a giant drug operation, and invalidates all of the digibux that were involved in the operation. A friend of yours who was a pizza delivery guy has hundreds of dollars removed from his digital wallet because they were tips from people who had participated in the drug trade.

Now you're sitting with 10,000 digibux, and you know that the government is pleased with the results of the previous sting and wants to set up more operations like that. Someone offers you 8,000 USD for your 10,000 digibux. You know that the 8,000 USD can never just vanish.

The number of digibux in circulation went down. But did that make the total value of digibux go up?

That's an excellent explanation and I appreciate it. I'm sure you've simplified some, but it makes sense to me.

> So if the bitcoins are seized by some government entity....wouldn't that make the total value of bitcoin go up? Supply and demand and all that...

You are only considering the supply side and assuming that the government seizing bitcoins from one of the major exchanges (and, subsequently, collapsing the exchange) doesn't impact the perceived viability of the bitcoin ecosystem (since, presumably, the same thing could happen elsewhere) and reduce the demand for bitcoins as well as the supply.

Also, it further assumes, on the supply side, that the government simply throws the coins in, effectively, a digital landfill -- otherwise, the fact that they were forcibly transferred from the exchange to the government doesn't actually have any effect on supply.

That's something I've always wondered about. When the DEA or seizes, say, a million dollars in cash from a drug dealer...where does it go? I assume the bulk of it goes into the pocket of someone. But where does the officially seized money go? Do they destroy it? Similarly, what would they do with 25,000 BTC? And could they even document it properly?

Depending on whether people viewed the seizure as permanent or not, it would reduce the number of available bitcoins and, theoretically, cause a price increase. However, that assumes the volume of bitcoins demanded didn't also go down, which would most likely also happen since a large-scale seizure would reduce confidence in bitcoin and cause fewer people to use them (and many people holding them to try to sell them for traditional currency).

An interesting idea, but it assumes that the demand doesn't change after a government seized a large number of BTC.

Yes and no in my opinion. Because while the total supply goes down, some confidence is also lost (at least short term).