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This Whole Bitcoin Thing Could Be Big, Says Bank of America
Nerval's Lobster writes "Bank of America has issued a research report suggesting that the crypto-currency Bitcoin could become 'a major means of payment for e-commerce' on its way to emerging as 'a serious competitor to traditional money transfer providers.' The bank attaches a 'maximum market capitalization' of Bitcoin at roughly $1,300, based on its position as a 'major player in both e-commerce and money transfer' as well as 'a significant store of value with a reputation close to silver.' Bitcoin has come close to exceeding that theoretical ceiling in recent weeks, although its valuation dove today after the People's Bank of China decided to declare it a volatile 'currency' without real legal status; that financial institution is also concerned about its use in money laundering and black markets. Bank of America sees Bitcoins' advantages as low transaction costs, its finite supply (which will protect its value), and its increasing attractiveness as an alternative to 'traditional' cash. As with the People's Bank of China, however, the bank sees the currency's extreme volatility and lack of legal backing as a bad thing, and frowns at the possibility that regulators could step in and increase transaction costs. 'A 50 minute wait before payment receipt confirmation is received will prohibit wider use,' the report adds. 'This is less of an issue for two parties that know each other because they trust the other will not double spend, but when dealing with an anonymous counterparty this creates a high level of unhedgeable risk.' Without a 'central counterparty' to verify transactions and thus mitigate that risk, Bitcoin could fail to break into wider use."
Miners will still receive the transaction fees for all the transactions included in the blocks they mine.
Transaction fees are key but there's a subtle issue here: while there are a finite number of bitcoins, there are an infinite number of (possible) digital currencies.
Sure, a few years from now bitcoin is going to be supported by transaction fees. But what happens when, say, Google, comes along with their own digital currency and offers lower (or even no) transaction fees? And what happens when (not if) someone develops a currency that is clearly technically superior to bitcoin - e.g. with a more (space) efficient mechanism to record transaction in the block chain.
One way or another there's eventually going to be another digital currency that is clearly superior to bitcoin. And people are going to start flocking to the hip new digital currency. So, not only will bitcoin be fundamentally inferior, it will also be losing value (i.e. massive inflation) - while the other currency will gaining value making it all that much more attractive.
That's not to say that there isn't a lot more money to be made it bitcoin before that happens - just that eventually someone's going to be left holding the bag (i.e. a whole lot of nearly worthless bitcoins.