1 - Scam. I regret using the word "scam" in my answer, because I think it overshadows the broader point I was making about Bitcoin's severe structural design flaws. After watching the community react to this debate, I'm pretty confident that the average bitcoin supporter is not intentionally defrauding people. Consider my inflammatory rhetoric redacted and apologized for.
2 - Volatility. Since April 1, the average change (up or down) of the bitcoin/dollar exchange rate has been just under 8%. That's unprecedented. It's a clean order of magnitude more volatile than the stock market, which is considered a "volatile", "risky" class of asset. It's two orders of magnitude more volatile than a legitimate currency pair like the Dollar/Euro. Now, it's all fun and games while the exchange rate is basically trending up, but if that trend reverses look out below.
3 - Liquidity. All of that volatility comes on an average bitcoin volume of something like 20,000 per day. If I put in an order for $15,000 worth of Bitcoin right now, I'm pretty sure I could move the market between 5% and 10% to the upside. It's probably even worse to the downside. Call me a skeptic, but with that kind of easy price manipulation, I'm not quite ready to denominate my paycheck in Bitcoins quite yet.
4 - What It Means. A number of people criticized me for not understanding that Bitcoin is designed to be complementary to traditional currencies, and that analyzing it as an alternative is invalid. A number of different people criticized me for not understanding that Bitcoin is a different kind of currency, which will inevitably replace traditional fiat money, and that analyzing it as a component of the fiat currency system is invalid.
The Bitcoin community is diverse, and no one really knows what this is supposed to be yet. That's totally fine with me. I can assure you I don't have any skin in this game. My money is in LinkedIn stock.* But I've studied world currencies extensively (and trust me, a normal currency debate is not this lively). So, I don't know what Bitcoin will end up as, but I know two things with certainty:
a) that it's unstable as a currency
b) that it's currently behaving as a speculative vehicle in an aggressive bubble
* That was a joke
Even if not a scam, your conclusion that it's currently entirely speculative is inescapable.
Aside from that, I thought this was an excellent rebuttal:
If the real economy continues to generate investment opportunities, wouldn't the deflation rate just supplement that? Sure, you could put money in your mattress for 5%, but if you can invest for a nominal 10% and thus yield a real 15%, why would you choose the mattress?
But then the mattress rate is also 15%.
Of course some loans are better than average, and some are worse. The "deflationary spiral" takes out the worse ones first. That lowers the average and takes out the next tier, until the average is zero. Actually it goes below zero, to the average rate of real depreciation (e.g. termite damage to houses). Well, that's the bottom equilibrium anyway.
I'm just surprised people aren't considering Bitcoins from a supply-demand standpoint. Why purchase Bitcoins in the long run unless you're laundering money or hiding from the government?
Some people like to play poker online. The same entities have been prohibited by the government from processing transfers to poker sites.
From a startup perspective, the "terms of service" for Paypal, Amazon payments, and others are full of applications you can't use them for, even though many of them are legal. On top of that, Paypal is notorious for locking accounts if they decide they don't like you.
Currency used to be neutral. Now it's not. So people have invented a new one that is.
I live in Europe and you can transfer EUR money from one country to another for free; that's progress. But from the UK (in the EU but doesn't use the EUR currency) my bank only allows me to transfer £5k (US$8k) per day to other European countries, and each time I do it they charge me £25 for the privilege (US$40). I had a tax bill recently in Austria (where I live) due to assets held in the UK, I owed £20k. (I have no problem with having to pay the tax.) That took 4 long phone calls over consecutive (business) days to transfer that money, and cost me £100 in total. Imagine if my assets in the UK, and thus my tax owed in Austria, had been 10x as large, or 100x as large.
I have no interest in dealing drugs or hiding income from the taxman. But using banks make things incredibly difficult, and charge huge fees for their trouble. It's time banks got "disrupted".
That's kind of odd to say-- couldn't you say the same thing about doing cash-only transactions?
There's also the hope that you can "hide" from corporations/bad-people and make transactions that don't require you to provide information that can be used for identity theft, marketing, etc. Just typing in a unique 1-time deposit number has a lot of appeal for stream-lining transactions and making people feel more comfortable performing electronic purchases. I'd love people to get addicted to that kind of high-privacy transaction and push more innovation for traditional currencies/startups to help with that.
In the modern world, every purchase of anything not bought at a yard sale is a privacy and identity concern-- I'm eager to see alternatives that find new ways to avoid that.
Yeah, I added that modifier after thinking some more. People are really interested in bitcoins as a "private" currency, and cash would accomplish the same thing. Large cash transactions raise flags, though.
Still, bitcoins are a bad alternative to popular currency for a number of reasons Adam mentions. An e-currency without a finite supply would be an interesting exercise.
The entire system could thrive on one bitcoin.
No, it couldn't. One bitcoin could not sustain a currency market, and a one-bitcoin market would value that bitcoin at highly variable prices.
I bought $30 of Bitcoin just a month or so ago. Obviously they've done very well so far and I'll just leave them indefinitely to see where it goes. Yup, that increases deflation. Nice, for a change!
I'd also be afraid of having my assets frozen if I transferred money to and from Mt. Gox or the other exchanges. To use Britcoin, for example, you need to send and receive money from an individual developer -- that is, from his individual account. There's not necessarily protection for his transferees if it turns out that he, willingly or not, was engaging in money laundering.
One additional thing that bothers me about the Bitcoin "community" at present is that they are engaged in an active and deceptive attempt to sanitize their public image. For example, in a Gawker story about drugs, Jeff Garzik, a core developer, inaccurately commented that Bitcoin could not be used to purchase anything anonymously. He surely knows that it wouldn't be difficult to do so; he appears simply to have been underplaying a regulatory risk that the currency faces in order to get part of the public on his side.
Bitcoin == marketing. It has very good marketing on its side, even if the marketing is in some sense "open source" and communal. In that sense, it's very interesting sociologically. But it's, at core, a deception in practice.
Bitcoins are quite likely a mistaken long-term investment, but it doesn't seem like its proponents are trying to trick anyone about the core ideas.
I'm just hopeful that it encourages more creativity in the space of private online transactions, digital currency advances, etc.