I find bitcoin fascinating, but everyone who's bullish on it should understand the fundamental issue with its price stability, as pointed out by libertarian GMU economist Tyler Cowen (among others, presumably):<p>> It is a privately created fiat currency, bundled together with an anonymity scheme for transactions. The anonymity scheme means there is some reason to grant one-time seigniorage to the original currency issuers. Eventually the anonymity scheme, in some form or another, will be available without the fiat currency. At that point, or more likely before then, the fiat currency will fall to near-zero in value. Hold it at your own risk. The original issuers will have kept some of their initial gains.<p><a href="http://marginalrevolution.com/marginalrevolution/2011/04/the-economics-of-bitcoin.html" rel="nofollow">http://marginalrevolution.com/marginalrevolution/2011/04/the...</a><p>Essentially, the value of a bitcoin is set by the value of all worldwide transactions desired which utilize bitcoin's advantages (anonymity, security from government intervention, etc) divided by the total number of bitcoins, which is capped. However, there is nothing to stop someone from starting a competitor (perhaps with some slight improvement) which duplicates all of bitcoin's functionality and essentially inflates away bitcoin's value. In fact, it might not be crazy to suppose governments would do this on purpose.