I'm a reasonably long time HN'er, and also just got back from a business trip with the owner of Mt. Gox, really the only working BitCoin exchange. In fact, I'm in Liberia, Costa Rica right now, checking HN waiting to fly home from my trip, and I saw him this morning.

We have, in fact, been discussing a co-founder partnership deal, so I have lots of right-now thoughts... Here's my summary on BitCoins, and what I think the system needs:

There are currently four categories of people interested in BitCoins:

1) Deflationary Currency wonks / Gold-standard tinfoil hat types

2) Crypto and Currency Nerds

3) Speculators

4) Russians

Here is what BitCoin is good for:

Semi-anonymous-to-the-rest-of-the-world transactions of bitcoins, accomplished relatively quickly with no regard for global borders.

The system is reasonably anonymous, reasonably secure and makes some fundamental innovations in how value is transferred around: Consider if you can think of any other digitally transmitted, no-central-authority, semi-anonymous value systems. I am unable to think of any, and have been thinking for a number of months now.

To naysayers like SwellJoe, I have a degree in Theoretical Math and a background in Cryptography, and I have read, fairly thoroughly, the process and mechanisms used, and would say that the system does a reasonably good job delivering what it promises. Of course, it's open source, so go crazy and come back with an alternate viewpoint.

So, to my mind, there's clearly a place for BitCoins on the internet. I believe they will be useful in four possible scenarios:

1. For digital goods that one wishes to purchase privately.

2. For international value transfers

3. For activities like 'tipping' others on the Internet

4. In a credits-type system where the developer cannot or will not produce their own system, either because users do not trust the developer, or it's just easier to use an existing one.

I don't believe BitCoins will ever be useful in a currency-for-hard-goods situation, for a few reasons, one of which is that labor is unlikely to accept it (except possibly in Russia, or places where the government currency is seriously broken), the second -- extreme currency fluctuation against USD is likely to continue for some time.

There are roughly a thousand users of BitCoin right now, maybe 2k. The coins are released, 50 per 10 minutes, regardless of number of users. Consider -- what will happen when 10,000 or 100,000 new users enter the system? If the currency tips at all, or multiple times, it is highly likely that demand will push cost of BitCoins very high. So, this makes it an appealing thing to speculate in right now, of course. And, might make you wish to participate in an online exchange as a founder.

To counterbalance, the issue of running an exchange for BitCoins has a few major hurdles. A quick scan of my listed usage scenarios indicates that Bitcoins are best for money laundering russian mafia and porn sites. Combine that with the fact that an exchange is allowing people to trade a fungible currency derivative semi-anonymously, and you have a LARGE raft of legal items and compliance issues to take care of. I've had three separate estimates run in the roughly $1mm to do filing and compliance, US only. Ouch!

To counter-counter-balance, if I ideate properly, a well-run BitCoin exchange could conceivably be a sort of Paypal/Visa competitor -- providing merchant services and easy payment transfers to a wide range of people who really need it. That's appealing.

I hope this has been interesting, I enjoyed getting my thoughts down on HN paper.