I don't know much about economics, but this seems to illustrate why bitcoin must ultimately fail. Since producing new bitcoins by design becomes exponentially (!!!) more difficult as time passes, the true cost in resources (electricity, computing time, etc.) to produce a new coin can only increase. That resource use can be justified, but only if the value of the bitcoin is also increasing.
Here's how I see it playing out: eventually it will be too costly for most people to produce new bitcoins. Since nothing forces one to use bitcoins, bitcoin holders will cash them out, and the exchange rate will plummet. Deflationary panic? http://en.wikipedia.org/wiki/Deflation#Money_supply_side_def...
It will always cost about the same to produce a bitcoin as the bitcoin is worth. If it costs more, people will stop doing it and the difficulty will drop. If it costs less, people will profit by doing it and the difficulty will rise as more people join in.
It's already difficult for individuals to produce bitcoins, but people have solved that by pooling their resources, getting regular rewards of fractional bitcoins.
That's helpful, thanks. Still, it's only profitable to mine bitcoins at any computing cost if they can be exchanged for other items of value. If the value of bitcoins drop and people leave the bitcoin economy, making the last N bitcoins easier to compute won't make them more valuable.
Here's how I see it playing out: eventually it will be too costly for most people to produce new bitcoins. Since nothing forces one to use bitcoins, bitcoin holders will cash them out, and the exchange rate will plummet. Deflationary panic? http://en.wikipedia.org/wiki/Deflation#Money_supply_side_def...