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Forget about the Bitcoin bubble, that's the least of the currency's problems right now.
The real problem is that it looks as if Bitcoin is failing in its original design-goal, to be a virtual currency which can replace more traditional methods of payment.
What am I talking about?
Well today Steam announced that it will no longer be accepting payment in Bitcoin and I expect to see a bunch of other merchants following suit and, as I think most of us could work out for ourselves, a currency is only useful if you can spend it.
Even those who are presently amassing great wealthy by simply watching the value of their Bitcoin stash grow on an hourly basis will find themselves unable to spend that coin when they want to actually realise its value.
Steam is citing the volatility of the currency as the main reason for its withdrawal and it's pretty easy to see why this would be a problem.
Right now Steam (like most vendors who accept Bitcoin) will be onto a winner. Bill someone for something worth US$100 and if they pay in Bitcoin then by the time the transaction is complete, you're probably getting more than the amount you billed, simply due to the way the currency is increasing in value all the time.
From a purchaser's point of view, paying in Bitcoin is not such an attractive proposition.
Paying for something worth $100 using Bitcoin means that you've probably ended up handing over more than $100 by the time the transaction completes.
So why did Steam pull out and why am I expecting to see more suppliers opting to ditch Bitcoin in the near future?
That's also very simple. While things are working in the vendor's favour (ie: Bitcoin value continues to rise) then they'll be winning -- but as soon as the cyber-currency's value takes a dip, bad things will happen. And we all know that this day is coming, sooner or later.
We're looking at a self-fulfilling prophesy here. The amount of positive feedback in this equation is huge... just think about it.
People are gobbling up Bitcoin because there is always someone else willing to exchange it for goods, services or plain old cash. If you've got $1m in your Bitcoin wallet then you can buy stuff with it or cash-out.
However, what happens when vendors start saying "Bitcoin not accepted here"?
Well suddenly the value of that Bitcoin starts looking a bit tenuous -- it becomes a bit like monopoly money in fact. What good is money that you can't spend?
Once this happens, a percentage of Bitcoin speculators will decide that it's time to bail. They'll try to convert their Bitcoin holdings into "real cash". That will trigger a fall in the currency's value (supply and demand -- plus the fact that only other speculators will want to buy). Now that positive feedback I talked about comes into effect...
Once a few scared speculators with large holdings of Bitcoin decide to cash-out, many others will also be scared by the declining value and seek to do the same.
Crash... crumble.. smoke.. burn... smolder!
It is perhaps only once Bitcoin returns to a value measured in hundreds (not tens of thousands) of dollars that it may return to being what it was designed to be -- a *currency*.
What do readers think?
Has Steam's announcement created the peak of the Bitcoin wave and will it be all downhill from here?
Or will hope prevail and see the currency continue to soar to new heights over coming months and even years?
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