Edit: Since many people are viewing this as an attack on bitcoins, let me clarify. I think the idea of bitcoins as an alternative currency is great. I am bringing these points up as a supporter trying to point out weaknesses to discuss—and ultimately strengthen the chance of bitcoin’s survival.
There is one fatal flaw with bitcoins that many people currently do not seem to appreciate. There will be no more bitcoins in the world.
Let me explain. There are only 21 million bitcoins that can exist in the world.
Every so often, people have a harddrive malfunction and lose their wallet. those coins are lost forever.
Sometimes, you hear about people losing a ton. Other times, its some guy who dabbled in mining, didn’t get a ton of bitcoins, lost interest and moved on. All of these lost bitcoins leak out of the system like an evaporating glass of water.
It doesn’t matter if the percentage destroyed is 2% or .1%. Eventually all bitcoins will be destroyed. That means it ceases to function as a medium of exchange.
This is bad because the value of bitcoins is that they are useful for transactions. If that value is taken away, we are just left with people valuing bitcoins “just because”. That is a weak foundation to go on. Modern currency is backed by the ability of governments to tax. Rarity will not be good enough to make bitcoins valuable.
There are many rare minerals in the world much rarer than gold (say, the gemstone taaffeite). Its estimated that all the world’s taaffeite would fit into a single cup. Its also a very pretty, pink gemstone. However, taaffeite isn’t that expensive.
Rarity does not mean something is expensive.
The Bitcoin protocol is still evolving so this can be fixed by putting in a method to ‘reclaim’ lost bitcoins. This is essential to bitcoin’s survival as a currency. Perhaps a wallet must ‘ping’ the network once every 5 years or it will be considered destroyed. (this is not so bad since lighter wallets will be the norm and these wallet services can do the pinging function for its depositors.)
Other solutions are available too, I’m sure. The important thing is that unless this is solved, bitcoins will not work as a currency or an investment asset.