At the beginning of the year, with BTC around 600 to the dollar, I made a bet with a friend (I was given 3:1 odds) that BTC/USD would be below 150 at the end of the year. I think there are some core flaws with cryptocurrency that, in order to alleviate them, effectively make their benefits moot.
As a target for theft, Bitcoins are basically a dream. Once transferred away from an owner they can be mixed with other (fungible) BTC and be no longer feasibly traceable to the a single thief. To harden the target, you can put BTC into a wallet that’s in cold storage (put it on a hard drive, take hard drive out of computer, hide under bed). This is all well and good, and there are even fancy services popping up that will do all kinds of things to ensure the security of your coins, but at this point you can ask yourself — why? Is it really that good of a store of value that it’s worth going to such an effort to preserve their possession? In fact, I see few sensible arguments for BTC being a useful store of value other than as it’s value as a transactional tool…
I think the concept of a block chain is interesting and has potential for many applications (that’s a whole other argument, here I only refer to Bitcoins and other currency usage). If the exchanges gets super liquid, you may even be able to use one for transactional purposes for lower total cost than a credit/debit card (debit is really the only applicable comparison here). I could feasibly see, with a large enough transaction flow, the profit potential from market making into fiat resulting in tighter spreads than the ~2% paid for interchange fees using plastic. How much lower though? A few basis points would be reasonable I think — similar to liquid electronic financial markets. But for market makers to be able to get it that tight, you would need pretty low underlying volatility — a high confidence in the stability of the value.
Chicken and egg? It seems like a solid bet that continued highly publicized thefts will become the norm and this will degrade confidence in the value. Without that confidence, it’s unlikely to gain the significant liquidity necessary to succeed as a transactional platform.