Bitcoin may still succeed, but it shouldn’t

I like Bitcoin - it’s a plucky idea. Decentralised peer-to-peer currency, pseudo-anonymity and an anarchist angle: who needs the banks, right? Its success is testament to the hunger for a non-bank alternative payment system.

Bitcoin’s unique masterstroke is also its fundamental flaw - the way that coins are algorithmically-derived means that there is a finite supply. They will run out (21 million coins is the hard-wired limit of the protocol), driving up the price of the coins in circulation.

Engineered scarcity and built-in deflation (the currency soars in value) means that Bitcoin is a commodity, not a currency.

The problem is, like gold, it enriches early adopters and concentrates power into a few wealthy institutions. It’s therefore entirely possible that we see a layer on top of Bitcoin - a fiat currency backed up by Bitcoin which becomes traded as a proxy. Ta-da! We’re back where we started.

None of this is to say that Bitcoin will fail, it may very well succeed, but if it does, it won’t be because it’s better.

Edited 28 Nov 2013: Several people pointed out that bitcoin mining will end in 2140, not in 'a couple of years' as originally stated.