Re: Tulip Trading
"So if Bitcoin can be used for investment and exchange then I assume you acknowledge the medium has value. Dollars have values, Pounds have value, gold has value and so does the iron in your example"
Yes - bitcoins do have a value and I agree readily. My point is that the value they hold depends almost ENTIRELY on investors. This is in contrast to fiat currency, where the value depends on the government and commodity currency, where the value depends on the underlying value of the commodity as something independently desirable/useful.
Of course BTC has value - it's just a wildly variable value (for the above stated reasons) and thus not suitable for use as a currency.
My point about government control was that government doesn't control the value of bitcoins - not that they can't regulate or tax or ban it.
This reveals itself as a two-edged sword. To small-government, tax-is-theft, libertarian* types, it is a positive as it means that the government cannot devalue the currency (e.g. by printing more money), which they see as theft. Personally, I don't see it that way but I don't need to support or oppose that argument because the other side is that when government can't devalue the currency, they can't guarantee it either.
Taking that together, my point is that Bitcoin can and does lose value so to use it as a currency, you are essentially replacing government control of currency value (as is the case with regular fiat currency) with INVESTOR control of currency value.
It should be blatantly obvious that one of those options is far more stable than the other but if it's not then consider that the price of bitcoins has changed by 16% in the past 7 days.
Now, that's an increase in value, against the USD so you might say that this is excellent news and if you got paid by your employer in BTC you have just effectively got a handsome pay rise. But look at it from a different angle for a moment - from, say, the perspective of a shop keeper.
Let's imagine that a shop-keeper pays his invoices on a 7-day period and is charged in BTC - because hey, let's use that as a currency. So, he purchases some stock at the cost of 10BTC on December 2. The invoice is for 10BTC which, at the time of purchase equates to ~$3600USD. Well and good. But now it's December 9 and time to pay the invoice and that 10BTC is now ~$4200USD.
We can foresee an objection to that logic which is that the store owner should just price his goods in BTC so he knows that he will be able to meet his obligations. To keep the math simple (it's December after all) let's ignore profit and say that our shopkeeper bought 100 widgets and sells them at 0.1BTC each. That way, once all are sold, it covers the 10BTC invoice.
The problem is that for price then jumps for the customer - from $36 USD to $42 USD and so the store is uncompetitive (excusing our no-profit shortcut) with another store that deals solely in USD and has their widgets priced at $36.
You can go further and say that this is no issue if the customer is dealing in BTC too but that assumes that they are paid their wages in BTC which then brings the problem of what happens when they pay their rent or mortgage, which would be in USD? In this instance, that's great because this week, their rent only costs 1.5 BTC where last week it cost 1.8 BTC, but what about when the value drops, as it did in Jan-Feb, when it lost 30%?
The resultant conclusion is that using BTC as an actual, day-to-day currency only works if EVERYONE does it.
But how do you ensure that that is the case when the currency is deliberately set up to prevent any kind of government control? It's that defining factor - universal acceptance (within the country) - that is one of the main points of fiat currency: it is designated by the government as legal tender.
And this addresses your point about stability because, while 'millions' may be using it and this may well make the currency more stable, it's very likely you'll still have to pay for at least some things in your local currency and even if you are able to avoid that, you'll need to pay your taxes in the local currency.
Which means that at some point there will be a conversion. Indeed at almost every point as anything you buy is taxed so the vendor must remit those taxes to to the government in the local currency because the government sure as hell won't accept taxes in BTC. When our shopkeeper remits the sales tax to the government, the government will expect that payment to reflect the value in USD.
And that's the bottom line - if the government won't accept it for payment of tax obligations then BTC will always require conversion to the local currency and thus it will really be a token of exchange representing the underlying currency of the realm.
* - By that I mean libertarians who also believe in the whole 'tax is theft', 'the reserve bank steals from the people' deal - there are plenty of libertarians who don't go in for that and so don't advocate for currency that is independent of government.