For all its technotarian groovyness, Bitcoin suffers from classic private currency flaws that make it a scam.
Bitcoin MIGHT work if only it was able to be unique. But there is nothing to stop a proliferation of identical networked coinage systems. Even if it were patented, the patent would expire. With no intellectual property protection, we would see an unlimited set of identical citcoin, ditcoin, etceteracoin.
With no limit on the amount of identically created coinages, what could stop the precipitous decline in value? Trust in the original? What reason would anyone have to trust one more than another? The basic problem is that bitcoins are ENTIRELY speculative in value: there is no intrinsic value (such as a real-world use) to them at all except perhaps the value as a medium for exchange: but there is no scarcity of mediums for exchange, so no intrinsic value.
We've seen this in the past when private currencies were attempted. Without trust in the currency because of a backing in something with intrinsic value, it rapidly can become worthless. Bitcoin has no backing. Even if it had backing, insiders may remove the backing and leave the currency worthless.
Bitcoin relies on some computational artificial scarcity to claim that it won't explode in volume and thus inflate away to valueless. I'd have to see a clear explanation before I believed it, but even so the prospect of innumerable competing identical currencies would create the same problem.
Bitcoin looks like fool's gold to me. A classic scam of selling something that will eventually leave somebody holding a worthless currency.
[Added 6/3/11] Here is Adam Cohen's criticism of Bitcoin. The punchline:
"But Bitcoin is not designed to be a functioning currency, it's designed to enrich early adopters. Again, that is why it is a scam. Period."
[Added 6/19/11] There’s a Virus that Will Steal all Your Bitcoins The first of many, no doubt. The features of bitcoins that make them private will also make them difficult to recover when stolen. Who will be the first to cash in by offering bitcoin insurance against theft? One reason why public assets are valued is because their theft is obvious.
[Added 6/20/11] Bitcoin Prices Plummet on Hacked Exchange At the very least, there's a whole new world of flaws to shake out of the system. Note also that they have "rewound" the transactions to solve the problem: do you want your transactions subject to somebody else's "rewinding"? Note also that the user database was stolen and circulated publicly. So much for privacy.
[Added 12/6/13] So this is how fiat currency dies, with thunderous CPUs?
As predicted, Litecoin has arisen. And it can make 4 times as many coins! It is open source, and thus can be reimplemented over and over by anybody who wants to open yet another bubble. But worse, "In fact, Cryptocoincharts shows something in the region of 164 different virtual currency-based cross rates in the market..." which means a minimum of 13 competing currencies.
[Added 12/31/13] How and why Bitcoin will plummet in price
Tyler Cowen uses my "citcoin, ditcoin, etceteracoin" argument (though with much more economics sophistication) to make a strong marginalist argument for why values of crypto currencies will plummet. Prices of currencies will be limited by marketing costs of potential competitors. "In short, we are still in a situation where supply-side arbitrage has not worked its way through the value of Bitcoin. And that is one reason -- among others -- why I expect the value of Bitcoin to fall -- a lot."
[Added 1/6/14] Coingen
"Think you can market an altcoin better than Dogecoin, Catcoin, or even Litecoin? Want to create your own coin and get in on this gravy train? Follow this simple form to get started with your very own alt coin!" Can you say proliferation?