people do all sorts of irrational stuff, or might even just have been investing for the future in this case.
this doesnt make the hash rate a fundamental of bitcoin.
this is a fallacy you see quite often here and in articles about bitcoin. people think that bitcoins are created from computing power and that's what gives them value because computing power is expensive.
even if bitcoins were created from hashing this wouldnt give them value. and they aren't.

Exactly. What a stupid, stupid argument. There is no other way to describe it. To say bitcoin needs more dollars to keep it going is to ignore the purpose of bitcoin. What bitcoin needs is more people willing to accept BTC in exchange for goods/services. It is not a "flaw", and it is not specific to bitcoin. It is a simple economic fact.

You do realize the irony in your nick though, right? Dig Dug blowing up and popping monsters like a bubble, er, balloon

Finally, someone with common sense.  Nagle put so elegantly into words what I've been thinking more and more this past week.

I call bitcoin more of a "digital commodity" as opposed to a "currency" and most of its value is speculative.  It's not being used for purchasing goods.  It's being used to generate more wealth.

I recognize in OP's argument my original doubts about Bitcoin.
But there is one major thing OP seems not to have considered : the demographics behind Bitcoin, and its motive.
People at the core of Bitcoin are not your average gullible Joe.
People at the core of Bitcoin are geeks, and many are also traders, scholars, hackers, businessmen or a mix of all these traits.
And they know what they are doing when they decide not to drop Bitcoin at the first occurence of the usual financial troubles.

This is the kind of demographics that has, countless times in the past, taken over huge slices of power from the hands of the establishment.
Free software that was seen as an amateurish nerd hobby, and an economical non-sense, is now the new paradigm that dominates the industry.
Peer-to-peer file sharing, this phony and illegal extension of private copy, is now maintream and on the verge of abolishing copyright.
Blogs may be perceived as amateur journalism, but they effectively shreded the business of major newspaper.
Hacktivism left the underground and is acting openly in the wild, leaking state secrets, crusading against liberticid laws, pushing transparency and accountability in government agendas, and triggering revolutions in despotic countries.
Influent black hats are in crontrol of armies of machines in the tens of thousands, that can lay waste at will in the digital economy.

Finance and monetary policy have remained surprisingly untouched... until now.
What you are seeing here is the first sizeable attempt by the geeks to take over the banking system.
That may sound unrealistic, but past occurences of such bottom-up revolutions show that this is a very possible outcome.

OP, you are right when you tell Bitcoin is a bubble.
But what you fail to understand is that unlike natural bubbles driven by greed, and broken by fear, Bitcoin is a programmed bubble driven by logic rules that guaranty a steady deflation for the years to come. We all know it, and we all know that this built-in mecanism gives us a few years to push Bitcoin into mainstream before it reaches the critical point where it can not anymore sustain alone its expansion.
If we fail to push Bitcoin in the mainstream, the bubble will burst before it gained enough momentum, and all we will have left is exhilarating memories of an epic ride (which in the end may account for more subjective value than the money that was lost).
If we success, the bubble will merge into the real word economy and stabilize before it has the time to burst.

Bitcoin may not generate value, but there is a huge slice of the real world economy at stake.
That is more than enough potential value to keep everyone on board until the end.

usoundmad.  99% of bitcoin activity is speculation, obviously.  I personally can't use it for day-to-day stuff because no business in town accepts bitcoin and I do business locally, with the exception of big-ticket purchases at shoppes such as NewEgg, who also don't accept bitcoin.

Link me to a gas station, laundromat, grocer, hardware retailer, hospital, college, etc., that accept bitcoin.  ....... ustillmad?

Of course you don't have to tell me what I should do.  But, that's what an argument is - i.e. an attempt to tell people what they ought to think or do if they accept the premises of the argument.

thats a little OT but an interesting question. if the official client makes no default minimum of a transaction fee and keeps relaying all transactions that means everyone sending a transaciton decides what transaction fee he pays. miners might reject some transactions, but only if there are enough other transactions that do have a high transaction fee.
eventually that will be the only income of a miner, and by mining the miner makes it less likely that the bitcoin network can be attacked, so he is a benefit to the entire network.
but network security isn't a benefit to the 1 guy who is right now sending a transaction. so why would there be any significant transaction fees as a whole?

why doesnt the mining community dry up and a large number of transactions are secured by very miniscule computing power?

I guess(!) initially the network was supposed to be secured by each client doing some mining and specialized hardware wasnt anticipated. correct?

why? maybe governments but that's a longshot.
large corporations don't have a history of spending big money on something that benefits all instead of themselves. only
there is the same lack of motive as with the sender of an transaction.

this might be the best argument for (unlimited) inflation of bitcoins so far.
(I don't see a deflation spiral happening)