This is a great intro to bitcoin. It made me feel more optimistic about the prospects of the currency.
It highlights many of the risks and benefits but misses out on what I think is the Achilles' heel of bitcoin, the ability for sovereigns to shut down the exchanges.
Without the ability to convert bitcoin to fiat easily, the currency loses its usefulness as a proxy for fiat currency. Does anyone have a convincing argument for how the exchanges are not vulnerable?
The situation is like the chicken-and-egg dilemma.
Definition 1:
'Good producer' is a producer that accepts bitcoins.
Definition 2:
If all the good producers together produce all that you need, then the number of producers is 'enough'.
Definition 3:
'Ideal state' is when enough good producers exist.
Theorem 1:
A producer will accept bitcoins if either of the following is true:
i. Ideal state has been attained.
ii. There exists exchanges that trade you physical currency against bitcoins.
Observation:
Once we are in the ideal state, we no longer need to have bitcoins converted to physical currency. So we don't need the exchanges to exist forever. We need exchanges only till enough producers have started accepting bitcoins.
Except the only ideal state is when you can buy anything in the world, not just "enough."
The great thing about good currencies is they can be exchanged for almost any currency and therefor can be used to purchase almost any good or service that is for sale.
Good point. I agree that major exchanges are vulnerable to regulation and shut down. I think localbitcoins.com (cash in hand or private transactions for bitcoins all over the world) is probably part of the answer (but not a very liquid or effective answer yet).
Even if BitCoin can't be exchanged for some fiat currencies, there is always the prospect of exchange through some middle step: either less restrictive foreign currencies, or commodities such as gold.
At this point, a full-scale governmental assault on BitCoin could slow it down or scare some people away, but it's highly doubtful that the growth could be stopped altogether. The bigger danger is that they'll embrace it wholesale and start taxing BTC exorbitantly instead. :P
Aren't the exchanges only necessary initially, for some definition of "initially"? Surely the goal is that, eventually, enough people are mining (or even receiving bitcoins as payment for labor) and trading among themselves for goods/services without any other currency in the picture.
There will always be other currencies, and currencies that are not exchangeable are less desirable and therefore less valuable.
Do you care if you are paid in Chinese Yuan or USD? The currencies are interchangeable, but Yuan is very hard to convert it USD and you'll lose a lot when you do.
Regardless of how big bitcoin gets, everything will not be transacted in bitcoin. People try to accumulate capital to buy big things, like cars and houses. If you can't buy a beach house in Costa Rica - and any beach house, not just from a few sellers - then the currency is less valuable and people will prefer fiat currencies.
Bitcoin must be easily exchangeable to be widely adopted.
It highlights many of the risks and benefits but misses out on what I think is the Achilles' heel of bitcoin, the ability for sovereigns to shut down the exchanges.
Without the ability to convert bitcoin to fiat easily, the currency loses its usefulness as a proxy for fiat currency. Does anyone have a convincing argument for how the exchanges are not vulnerable?