I am new to Bitcoin and have several concerns. Maybe you guys can ease my concerns.
A) I think that when you talk about Bitcoin as money, you have to look at two aspects.
1) USABILITY, meaning can Bitcoin function as money and
2) "WANTABILITY", meaning is Bitcoin practical and better than other alternatives (digital gold, paypal, fiat)
1) Regarding the first aspect the main concern from goldbugs and other people is that bitcoins might not be scarce and thus be unsuitable. The argument is, that bitcoin can experience inflation through the introduction and use of similar alternative currencies. A valid counter argument is that the first to market principle and network effect will mean that alt. currencies can only be successful if they offer significant benefits to bitcoin.
Couple of points that might diminish the network effect: Merchants could use a software that allows them to accept all kinds of cryptocurrencies so that customers can choose which currency they would like to pay in. Litecoiners could use litecoin and bitcoiners bitcoin. This would reduce the network effect.
2) My main concern however is WANTABILITY. Bitcoin would have to offer significant benefits to other electronic currency like paypal or goldmoney.
a) Bitcoin is anonymous and decentralized. This argument is often brought up by bitcoin supporters as a benefit of bitcoin. However I see it as a disadvantage. Or putting it in another way: If bitcoin wants to become a major currency it will become centralized and loose its anonymity.
The reason for this is banking. Pooling resources so that they can be lend out is a vital need for any economy. This is why banks exist. If you have bitcoin banks anonymity wont be allowed by regulators (thats why number accounts are not allowed in many countries) and this will be easily enforced on the bitcoin bank. Also the bitcoin bank will mean that bitcoin wont be decentralized.
b) Bitcoin transaction costs are cheaper than paypal.
We all know that bitcoin needs miners to ensure that transactions are save and that no double spending occurs. These miners will costs a lot of electricity. At the moment miners are paid through inflation (creation of bitcoins). In future they would be paid with transaction costs. So my question is how can such a system be cheaper than a system that does not need miners?
Secondly if bitcoin wants to become mainstream it will have to comply with all the regulations other systems like paypal have to follow. This will also increase cost.
c) Trust
The next problem I have with bitcoin and its wantability is trust. At the end of the day bitcoin is asking people to trust in its code and that no alternative currency will replace it. Its like investing in a technology. You never know if a better cryptocurrency might come along. This will mean that it will fluctuate a lot (every time you hear about a new cryptocurrency). Will people want to store wealth in a technology that might be replaced. I think it is rather nerve racking. Also if alt currencies that are similar (like litecoin) can already dilute bitcoin by about 5% what will happen when real marketing gets behind an alternative.
At the end of the day you are asking people to believe that 1) the code cant be hacked 2) No alt. currency will inflate bitcoin or even replace it. With gold for example its easy to trust, as there is a physical limit to it. If people realize that unlimited amounts of alt. currencies with different codes or similar ones can be created they might loose faith in bitcoin. Because at the end of the day its man made and a bunch of air. Every code has errors many might think.
So if we let digital gold compete with bitcoin I think many people will prefer digital gold like goldmoney. Its easier to trust its scarcity and less complex.
B) Bubble at current price?
Obviously the price has exploded. My concern is that the price explosion is due to the fact that people think they will become rich when holding bitcoin. They dont care if its actually suitable as a medium of exchange or if other forms like digital gold might be superior. Also the transactions have not increased with the price. So the explosion in price might be a sign of speculation not a sign that bitcoin is superior to other media of exchange!