Now, if the central bank destroys any value as a speculative investment, then the exchange rate may drop, but it will only ever go as low as its utility value. This floor is some function of the amount of wealth that needs to be exchanged, and the number of 'circulating' coins.
Of course at that point it doesn't matter how good of a job was done destroying BTC as an investment. They will be so cheap that people are bound to gamble. It may be that billions were lost last time around, but im sure that millions were made. Human psychology is such that there are always going to be people that want to take a shot at that.
See, this thing that 'the exchange rate may drop', is key. For example. If I were a business accepting payment in Bitcoin today for example. At some point, I may have received a $1500 order, paid for in Bitcoin, so ~ 10 Btc. Now however, that I need to turn my Bitcoin into money, that 10 Btc is only worth $1150. My profit on the order was only $250, so I am working to be down $100! This is a fkn crazy way to conduct business, and simply not viable. If I am prepared to put up with this kind of risk in the running of the business which provides my daily bread, I may as well just sell up, go down the casino, and put everything on red!
With sort of volatility we are seeing in Bitcoin, it is strangling real world transactions on the way up, but will destroy the real Bitcoin economy on the down. Yes, there will always be people looking to buy back in, and the market places that rely upon its use will also seek to rearrange themselves after the dust settles, but as mindtomatter describes, in this manner, Bitcoin can be held in its place as a fringe asset, popular with high risk tolerant speculators, and online drug customers. It will bring a few people exceedingly large profits, but leave the majority with a disgusting taste in their mouths.
Thats the purpose of using someone like bitpay, you have the option to do instant conversion to fiat at the point the buyer pays, so if you want zero exchange risk, that's the one for you.
The risk remains for the buyer, but I think the buyer (one hopes) is well aware of the risks of holding bitcoin!
