Bitcoin: What's wrong? What's right?
Bitcoin is a mostly untraceable, mostly secure and finite digital currency. There will only ever be 21 million bitcoins, meaning they won't be inflated away ad infinitum. I like bitcoin; I think it's great someone is trying to stick it to the man. However, bitcoin has a fatal flaw, and we'll cover that later on.
So why is bitcoin good? Its decentralized, and the network of bitcoin users keeps tabs on itself, knowing the location of every bitcoin. This prevents people from making counterfeit bitcoins and is what makes the system generally hack-proof. Bitcoin digital "wallet" theft, just like identity theft, is always a concern.
You can actually buy real stuff with Bitcoins, and since its untraceable, you can buy illegal drugs on the internet without serious risk of being caught. Unbelievable. Bitcoin gives people more freedom to do as they please with their own money, for better or worse, and this is mostly the point. Bitcoin exists outside of the IRS, the Federal Government, banks and basically every other authority. You can't have your Bitcoins frozen by the Feds, and as long as you can access the internet, you have access to your Bitcoins.
However, regardless of how impregnable the security, and totally independent of all things Bitcoin, there is an unavoidable vulnerabilty shared by all digital currencies that have no legal authority or protection.
What's my point?
There is absolutely nothing keeping me from creating bytecoin, bitcent, bytedollar, bytecent and bitdollar, all absolutely identical in every way to bitcoin, except less famous. The hard part, designing a functional online currency, is already done for me. Just look up Beenz. Just look up Flooz. What would maintain Beenz and Flooz value, when someone else can make Fleenz and Boonz with nothing to distinguish them?
Fiat means "it shall be" in Latin. In regards to "fiat" currency, it means that a worthless piece of paper now becomes money, this paper is better than that paper, and you must accept this paper in return for goods and services because a government said "it shall be so". These protections must exist to support an intrinsically valueless currency because a limitless number of equally valid currencies could otherwise compete.
Certainly, the voluntary system of bitcoin is admirable because it doesn't contain this element of force. However, when the competitors come, and as it is becoming increasingly profitable to do so, they absolutely will, there is nothing to protect bitcoin, bytecoin or any other digital currency from a flood of competitors. If two identical systems can exist alongside one another, the "supply" of digital currency has doubled. If three can exist, then it has tripled. The barrier to entry is only the capital cost of creating a new and better advertised system, and the market cap of bitcoin is coming up on a billion dollars.
There will certainly be criticisms of this stance. For instance, how can 2,800 functionally identical stocks exist on the NYSE? Dow Chemical is different from Enron, and Exxon is different from General Motors and they all represent finite shares of real companies. However, in the instance of a copy-paste of the bitcoin system, there is literally no difference.
What about VCR and BetaMax? They were two basically identical systems, and one ultimately won out. This is true, but in a tangible system that requires some kind of choice of hardware, ultimately there will be a tipping point and a standard will be established. However, in the case of money-creation there will always be huge advantage to creating a "store brand" (Amazon?), as early adopters of new currency benefit most.
In the end, people have two choices of currency; hard-free currency like gold and silver, or unbacked-fiat money, like dollars and Euros. Unbacked-free currencies have never existed for long, unless you count Monopoly money. If you are riding high on rapidly appreciating bitcoins, I wish you the best, but I can't see this experiment in unbacked-free currency doing anything but ultimately joining the ranks of Beenz and Flooz.