It seems like every other site or blog is cranking out an article about bitcoins those days, so let’s do one too.
Let me start by telling that I have always been a fan of internet currencies and 15 years ago I was among the first one thousand people to open an account with the now defunct e-gold. So, it may surprise you (or not) to know that I haven’t gotten into bitcoins and also do not plan to buy any. Here is why.
As with every other form of “money”, a given piece of currency is only worth what other people are willing to give you in exchange for it. It can always go up or down. This is no different for bitcoins. And what people are willing to give you in exchange for a given unit of currency depends among other things on how scarce that currency is.
When I first heard about bitcoins a few years ago, the concept stood out for its decentralized system, and for its mathematically guaranteed limit of no more than 21 million units that can be created (“mined”). The latter was of course designed to create a certain scarcity, which is needed if the currency is to have any perceived value.
But I was always wondering: what will stop people from tweaking the formulas a bit and start other competing crypto-currencies? And that’s of course what is starting to happen. On an exchange called cryptsy over 60 different crypto-currencies can be traded, and you can only expect that number to continue to rise as long as there are people who pay for such currencies.
The implication is that there is only an artificial scarcity of bitcoin style crypto-currency. There is no real limit to the number of different crypto-currency systems that can be designed, so in reality there is an unlimited amount of crypto-coins, which means their true value is zero. What will happen when people wake up to the fact that crypto-currency can be created in unlimited quantities? I don’t know, but that’s why I don’t buy into bitcoins or any of its clones that are popping up.
That being said, I do think that crypto-currencies are here to stay. I think some of the decentralized protocols designed for bitcoins will find good use.
But some competing crypto-currencies will eventually find ways to offer a more attractive set of features than bitcoin does. For example, savvy companies may link a crypto-currency to intrinsic value , e.g. the delivery of a future service, just like corporate scrip. A company could also use its own stock to be the currency to float within their network. I think facebook and twitter have missed a really great opportunity by cashing in their shares for $. They could have issued 1 crypto-share to each of their users, and let that share be used as a currency. The more the currency gets used, the more valuable the network and thus its shares become, attracting more users. Such a crypto-currency would have intrinsic value because it represents ownership in the company and could pay dividends.
So, I think that’s what will replace bitcoin: crypto-currencies that are somehow linked to real intrinsic value, and crypto-currencies that have designed a way to pay dividends out of profits generated within the system, without needing to know who owns the crypto-coins. They will neither be centralized nor decentralized but rather “semi-centralized” . When that happens the decentralized crypto-currencies with no link to intrinsic value will start going to zero.
I don’t expect bitcoins and its spinoffs to be outlawed. It will become too difficult to control. Governments will eventually adapt by abolishing income taxes and increasing property taxes, as they will always find a way to suck your blood “help you”. Unfortunately, you can hide your crypto-coins and what you do with them, but you cannot hide your home or your car. So, it will be far more simple and effective to tax you on your tangible property. Income tax has never made sense anyway, because it amounts to punishing creativity and productivity.
Zero interest rates will never revive the global economy, while zero income tax rates would do it within a year. The only question is: how long will it take our goverments to realize that they are the sugar in the economic tank? Bitcoin could become the catalyst for that change. But I expect it to be replaced by newer ideas fairly soon, just like AltaVista was superceded by Yahoo and Google…
Be well,
Danny
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LunaticTrader 
Some of these competing currencies already represent significant stores of value. The value of a single bitcoin on the most popular exchange was $93.70 at time of publication, and the total value of all bitcoins in circulation just over $1 billion (it was over $2 billion at the market’s high point last week). The largest alternative cryptocurrency, litecoins , were worth $2.31 each and $38 million in total; the next largest, PPCoin , were worth $0.22 each adding up to a total value of $4 million.
Sure, these coins have a price and you can calculate their current market caps.
But just because something has a “price” does not mean it also has intrinsic “value” or is a store of value. That’s two different things.
Just like you can have a compnay without any assets, but some people may be willing to pay a certain “price” for the shares of that company.