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1) What do you see as the primary strengths or advantages of Bitcoin; why is it needed? Put another way, for an individual or a business just coming across it, why would they chose to use it?
Bitcoin is an open, international payment network. More and more businesses are choosing to accept bitcoins because it is an easy way to allow anybody, anywhere in the world, to pay for products or services-- even people from countries where credit cards and bank accounts might not be common.It is also very low-cost, because it was designed for the Internet.
Individuals use it for a few different reasons.
The earliest adopters started using bitcoins either because they like the idea (for political or personal reasons) of using a currency that isn't controlled by a government or corporation or just because it was "new and cool."
Some people use it because they have no other choice; for example, more and more legal, online gaming sites use bitcoins to make it possible for players in countries that try to restrict onling gaming (like the US) to play.
We're just starting to see individuals using bitcoin because it saves them money; merchants are starting to pass on some of the savings (much lower transaction fees, no "chargebacks") to customers who pay using bitcoin.
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2) Bitcoin isn't the first or the only digital currency, but it has rapidly become the most prominent. What accounts for that?
People trust that it isn't going to disappear, because there is no central organization that can either go bankrupt or be forced to shut down by a government. Currencies are all about trust, and more people are beginning to trust this decentralized currency that is supported by everybody who uses it.
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3) A number of people I have spoken with dismiss it as little more than a speculative fad, akin to the Dutch tulip mania or a dot com stock, and cite the recent run-up and collapse as evidence. What is your reaction to that argument?
I still tell people "only invest time or money into Bitcoin that you can afford to lose." I expect more drama and chaos and price fluctuations in the short-term. The current price bubble was driven by lots of attention in the press here in the US and in Europe, and all of the attention was self-reinforcing: stories about Bitcoin's dramatic price rise got people interested, which drove the price higher, which triggered even more stories.I expect that will happen again in the next few years, perhaps in a different area of the world (maybe there will be a China-driven bitcoin bubble in a few years that will pop when the Chinese government decides to try to restrict bitcoin transaction across their Great Firewall).
But in the long-term, I expect that to settle down, and the value of a bitcoin to become much more stable.
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4) Would Bitcoin need to have a more stable valuation for it to become a more widely accepted alternate currency? What else might be needed for it to grow beyond a niche?
Actually, the valuation isn't a big barrier to adoption. There are already services that help companies manage the currency exchange risk (you can peg your prices to dollars, your customers can pay the equivalent amount in bitcoins, and you get dollars deposited to your bank account), and as the financial service infrastructure for Bitcoin get more mature that will just get easier.Any important new technology grows by starting with successes in some niches where its advantages are overwhelming; ubiquitous technologies then manage to slowly grow out of those niches to take over markets where they have a marginal advantage (either in convenience or price).
That is the pattern we're already seeing with Bitcoin, starting with niches where the advantages are too large to ignore (e.g. online gaming, international payments). It remains to be seen whether or not Bitcoin can grow out of those niches to become a ubiquitous form of payment. In theory, the value of a currency increases as more people use it. Since the potential market for Bitcoin is every person connected to the Internet, it could become more valuable than any national currency that is tied to one specific geographic region of the planet.