First of all, I love the concept of Bitcoin. I love a currency that's outside of the the control of governments, or law enforcement agencies. I love the built-in feature of fixed number of money supply.
Around 2004-06, I had similar feeling towards P2P technologies. I spent non-trivial amount of time reading BitTorrent's source code, following the latest development in Distributed Hash Tables. By then, Skype was this shiny little startup from Estonia that uses P2P to achieve significant call quality improvement with little cost. However, almost 10 years later, P2P still hasn't been accepted by mainstream. Yet.
I did a quick landscape research on bitcoin recently. My feeling is that it's still too early for us to know for sure what might come out of this experiment. The smeared reputation as a currency for buying illegal goods, the extremely low usage of the currency and the government's cramp down all reminds me what has happened to BitTorrent and P2P technology could happen to Bitcoin as well.
My conclusion is Bitcoin is overvalued but it will stay high as long as US keeps printing its dollar and China keeps loaning money to the US. This does not mean Bitcoin has a bright future though unless the mainstream starts to accept it as a currency for transactions. Here are four good links I have found on this topic. Go reading them and form your own opinion.
Bitcoin Industry Sees More Investors than Startups: The increase of Bitcoin value seems to be a result of traditional money diversifying their "portfolio" instead of driven up by real usage. (via @joshuabrustein)
With deal activity shooting up in Q2’13 as the graph below illustrates, there are currently more venture capital and angel investors interested in the Bitcoin space than there are actual investor-backed startups.
“We discovered that almost all these large transactions were the descendants of a single large transaction involving 90,000 Bitcoins which took place on November 8th 2010, and that the subgraph of these transactions contains many strange looking chains and fork-merge structures, in which a large balance is either transferred within a few hours through hundreds of temporary intermediate accounts, or split into many small amounts which are sent to different accounts only in order to be recombined shortly afterwards into essentially the same amount in a new account.” (source: Dorit Ron and Adi Shamir, Quantitative Analysis of the Full Bitcoin Transaction Graph.)”
Topic: Current Bitcoins in "circulation": Due to the nature of Bitcoin and how many people hold it instead of using it, it is not surprising to see that it's hard to come up with an accurate circulation number. I don't treat this as either good or bad though. It's this inevitable nature of Bitcoin that might surprise normal people who are used to the concept of Central Banks and controlled number of money in circulation.
I could have a million BTC in an address that hasn't been touched for 2 years, and then add 10 BTC to it today. That shouldn't add a million and ten to the "in circulation" number; it should just add 10 BTC.
Bitcoin Bits and the market: Don't call me a Bitcoin critics because I am not. I want it to succeed. It is spirit lifting to see a real world market where goods can only be bought using Bitcoin. Usage is the oxygen to ideas. I don't believe in any other alternative ways for bitcoin to gain momentum except to have more markets like this.
It is truly an "open air market". Folks were buying and selling Bitcoin for cash. You'd hand someone the cash and they would take out their phone and send you the Bitcoin in a mobile wallet to mobile wallet transaction. I also bought a Bitcoin t-shirt using Bitcoin sent from my mobile wallet. There is something real and tangible about an open air market where the only currency allowed is Bitcoin.
After reviewing this article, Aldo Cortesi gave a valuable comment on how Bitcoin is compared to P2P technology on usability and mainstream's inertia:
I think P2P never caught on because a) it was never very convenient for the user, and b) it was stigmatized due to transfer of illegal/pirated content. Structurally, Bitcoin has a better chance of actually solving some long-standing, existing user convenience issues. But its stigma problem is even greater than p2p, though.