Since the Cyprus crisis the price of Bitcoins has rapidly increased. Felix Salmon wrote one of the better articles about this. But the article has its problems.
He opens by talking about someone who lost all his Bitcoins when his computer was hacked. This is avoidable by storing funds in an off-line wallet, which is just a file containing a private key used to transmit funds. It is not much different from storing gold, except that it takes up less space, backups can be made, a thief would need to both steal your wallet and know your password, and it is possible to pay money in to an off-line wallet. You only need to expose your wallet to the Internet to pay money out of it. All this requires a certain amount of skill and knowledge but so does any method of storing value.
Salmon uses the word “anonymous” carelessly. Bitcoin is not anonymous and not intended to be. It is pseudonymous. Every transaction is visible, and it is possible for the government to find out, for example, which bank account was used to buy some Bitcoins. You can probably take steps to make this so expensive that law enforcement could not afford it. But that is a practical point, not a mathematical one, and it would be a mistake to think that anonymity is built in.
Salmon complains that Bitcoin needs too much technical expertise to use. But not everyone need use Bitcoins directly for them to serve as a store of value, any more than people need to handle physical gold themselves. That one has the option to do so if one does not trust others is nice, but trusting others for convenience is possible too. If Bitcoin were widely adopted, I would expect to see secondary currencies backed by Bitcoin to be used as cash, and the equivalent of Visa and Paypal to be implemented by someone.
Salmon points out that the value of Bitcoin is very volatile and closely tracks media coverage of it. This is because there is a fixed supply (there will only ever be 21 million Bitcoins) and new people are still discovering the currency. After every media report the number of people who want Bitcoins increases. Once everyone knows about it who would want to buy it, the price should settle down as the overall demand for money is not so volatile.
Salmon’s main point is that Bitcoin is doomed to fail because as it is adopted its price will increase rapidly, which hyperdeflation will mean no-one spends it. But such a situation can not persist; as soon as the price settles spending will resume.
Although I am optimistic, there are plenty of ways it could fail. Something better might come along, or governments may attempt to put a stop to it and may succeed enough to make it fail.
Or in twenty years’ time you could find yourself having bought one 21-millionth of the global money supply for a very good price. 😉