With media reports on Bitcoin's soaring price, the millionaires it has made and the growing number of businesses accepting it as a form of payment, many people are now asking whether it may become the digital currency of the future. I have always believed that a common digital currency presents profound opportunities in a digital world, but there are a few things that need to change before Bitcoin can be widely adopted:
1. Aside from any other esoteric issues, price stability is required for a payment method to be trusted. People want to know that the currency they use will still be worth the same amount the following day. This is critical before a currency can be adopted as a medium of exchange. Bitcoin remains inherently unstable despite its relative stability over recent weeks.
2. Bitcoin must become easily traceable. Authorities and law enforcement bodies need to be able to trace money so that they can prevent money laundering and fight organised crime. Bitcoin does not provide this capability to 'follow the money' - indeed this is one of the reasons it has been labelled as a currency for 'money-launderers and drug-dealers' and also why it has been targeted by cybercriminals. Silicon Valley libertarians may reject this, but the modern world won't accept anything else.
3. Bitcoin isn't reversible. Currencies must be reversible so that banking errors can be resolved and money can be refunded. If it's not reversible then you can't get refunded for goods you want to return, resolve mistakes that are made, or provide the trust and Consumer Protection that is needed on the Internet.
4. Bitcoin is a commodity not a currency. The vast majority of Bitcoin is being held or traded rather than being used as a medium of exchange - if only because owners are hoping for its value to keep rising. The numbers speak to large traded volumes, but few of these represent trading - not even for virtual products.
5. Entire fortunes are lost due to conceptual weaknesses in the system. There have been countless examples of Bitcoin holdings being lost or stolen. I don't want my fortune under the control of a sys admin. I used to be one, and I wouldn't trust myself with my money.
6. The mechanisms of currencies need to be transparent and understandable. Bitcoin buzz of today is more akin to a Ponzi scheme than a currency - it promises extraordinary returns through some mathematical magic that 'you don't understand, Sir'. As a result it is impossible to calculate its actual value in any real world context.
7. Most of the opinions that are being heard are those of people with huge vested interests in Bitcoin. Some are even claiming that Bitcoin is more predictable than the dollar. The media is becoming increasingly sceptical of these views. If it continues it will have further impact on trust - something of critical importance for Bitcoin to be widely respected and used.
Digital currency is nothing new. Many thought Second Life's Linden dollars would become the currency of the future but most people have forgotten about it altogether. Facebook Credits could have done it, but didn't. We even dreamt that Skype Credits could be this currency. Bitcoin has, however, made much more progress and it is by far the most promising innovation in digital currency. If Bitcoin, or another reincarnation of it, can address these issues, then we really will have something to get excited about.
Bitcoin commentator, venture capital investor, engineer and entrepreneur Michael Jackson is a partner at Mangrove Capital Partners and was previously COO at Skype. Michael has discussed Bitcoin with governments and at some of the technology industry's most respected events - including last year's TechCrunch Disrupt and Dublin Web Summit.