The hype around the bit coin has been surprising. I have been dubious of the virtual currency since first hearing about it at the relatively low value of $100. At the current Bitcoin value of US$566 it seems that I got it wrong. However, considering that the exchange rate has recently fallen from a high of US$1,100 maybe not.
Key reasons why I think the Bitcoin will never be accepted generally as a medium of exchange:
1. Volatility: the coin is volatile, I am sure that no one would argue with me on this point. From an extremely low value to over US$1,100, the volatility of this virtual currency makes it a high risk for anyone who wishes to hold it or accept payment. Suppose that a retailer decided that they would start accepting Bitcoins for payment, that retailer risks losing his entire profit margin due to the volatility of the currency, particularly if the same retailer is using conventional currency to buy the goods initially.
2. Unregulated: the currency was created by Satoshi Nakamoto, a pseudonymous developer or developers. In my view, someone who puts their funds in a product where the creator is unknown is very foolish or simply begging to be poorer. In addition, their is no one to guarantee the safe keeping of this wealth as members of the first Bitcoin "bank", MtGox discovered. Generally, conventional currency has a number of safe guards, if a typical bank was robbed of all its funds, an impossibility or goes bankrupt, the government will step in to assist. In addition, in all developed countries, the banking industry is carefully regulated by government bodies to ensure safe guards are in place.
3. Popularity would lead to its failure: suppose that the volatility and fears about unregulation all abate and the Bitcoin does become popular. Its popularity would lead to its downfall. The reason being, in every single country, the currency and money supply is vital in the operations of a modern economy. The government can implement taxes however there is little reason why this could not be implemented on a virtual currency. Perhaps more important than the tax considerations, the currency acts as a natural hedge to economic conditions i.e. when one economy is performing poorly, its currency should weaken making the country comparatively cheaper. Finally, the money supply is a key tool in the management of the economy and is managed by the central bank. If this is removed, the economic cycle will be altered dramatically. In short, the popularity of the coin would see it being banned, at least partially by governments in order to ensure continue to have control over their economy. In fact, China has already started regulating how the Bitcoin can be used.
