Re: Your numbers are gone
"Currency 'value' is based in confidence."
Absolutely - confidence that people will accept your fat wad of cash in exchange for their goods.
People hold a portion of their wealth as the currency 'of the realm' because they have confidence that they can exchange that currency for the food they need to avoid starving, the apartment they need to avoid the wolves and the alcohol they need to avoid the crushing realisation that they are spending their lives working just to provide food and shelter and when was the last time you took me somewhere nice anyway?
There is another, more 'economics 101' component required for a functioning fiat currency and this directly influences the confidence that people will give you beer for dollars/vodka for rubles. This is the confidence that the government will control inflation, ensuring that the value of the held currency (in wallets, bank accounts and under mattresses) will be much the same when you spend it as when you earned it and therefore people can be confident that they can meet their financial obligations.
This, in turn, gives people the confidence to spend their money and so allows the economy as a whole to tick along nicely. If people are not confident that the value of their held currency will keep a steady value from one day to the next then the normal functioning of a (capitalist) society can break down.
This was of course seen vividly in Zimbabwe and no amount of military might made a lick of difference in the end. The government failed to keep inflation steady and so the currency de-valued. Measures were implemented to control it but each of these failed in succession and people lost even more confidence. In the end the confidence of the people was so utterly destroyed that Zimbabwe now doesn't even print its own money anymore and people use various other foreign currencies instead.
To start with, the Zimbabwean government made the use of foreign currency illegal, of course, but the confidence in the ZWD was gone and a black market sprung up. Eventually they had to allow it as a functioning economy (no matter how dire) with a foreign currency is preferable to a non-functioning one with a local coin.
So, confidence is indeed the important thing, but it's confidence that the government will keep inflation in check and thus currency will maintain its value. This gives businesses the confidence to accept money and the confidence consumers to, well consume; to spend a sensible amount on what they need for the present and save for the future. It gives banks the confidence to lend money, safe in the assumption that the money repaid will cover the value of the money lent*.
This need for confidence in the value of held funds, coupled with the economic importance of having a single currency for easy trade fairly insists upon government control of a that currency. It doesn't always work, of course, and the main selling-point of Bitcoin from a monetary-policy sense (rather than libertarian/privacy sense) is that it is a limited resource and thus its value is not tied to any government decisions; a government can't deliberately devalue the Bitcoins through monetary policy, for example.
But even this is misguided; a government can effectively locally devalue a currency such as Bitcoin at a stroke by banning its use and accumulation, as occurred with gold.
But even without such heavy-handed tactics, there is no way for a currency such as Bitcoin to provide the stability required for true market confidence because there is no way to ensure a steady, predictable value. This makes borrowing and lending equally unwise in the long term and thus stifles the economy.
In the end, using Bitcoin as a 'real' currency is about as sound a policy as using Twitter shares; neither are backed by any real power and both are subject to market factors. The huge gains of Bitcoin, while undoubtedly excellent for those in the right place at the right time (and good on them) are, far from being an indication its strength as a currency, are near proof of its status as an investment instrument for the financially savvy alone. It is imperative that a 'real' currency carry VERY little risk as that gives people (again) confidence to accept that currency as payment and subsequently hold it in anticipation of future outgoings.
Anyone of us might, in the 20/20 vision of hindsight, have wished they converted all their savings to Bitcoin a year ago but few would exchange their conventional currency for Bitcoin now and any that did would do so with the hope that they would be able to exchange those purchased Bitcoins for a greater measure of regular currency at some later point. I.e. they are making an investment.
Short version? Bitcoin is a synthetic forex instrument and not a real currency.
Wow - that's a long post. I would apologise but . . .
* - If a bank lends $100,000 to someone who earns $1000 a month at a time when a cup of coffee costs $5 and the inflation goes all hyper-mental, a few months later that same borrower may be earning $1,000,000 a month and that coffee now costs $5,000. The value of the loan is now 20 cups of coffee. Extreme example but illustrative and not unheard of.