I have a bigger issue with BitCoin. It was not mentioned in the response.

Bitcoin is too volatile to use. Because USD is a set amount backed by the government, and because it de-values, I can do things like: Write a contract specifying a rate of pay for a job to the contractor lets say per hour.

With bitcoin this is not possible. I cannot say "I will pay you 5 BTC/hr (50 USD now)" because once I say that, tomorrow that 5 BTS may be worth 100 USD.

Now if the world suddenly and magically switched to BTC by tomorrow night as the only source of coinage, sure this will work. The exchange rate will be stable.

However as Adam points out, this favors the early adopters. Yes mining helps the BTC network, however mining favors early adopters (sorry too late by now) who mined a shit ton of BTC and now have insane amount of money due to exchange rate. They just literally printed their own money and you bought it.

So given the above what really happens is: I need to have a bank of bitcoins, and money must flow not sit for it to be valuable (extremely important, money sitting still is a commodity not currency). I need to be able to spend in BTC and buy in BTC. With that if all my assets are in BTC, me writing a 5 BTC/hr contract is perfectly fine. I don't care there is no conversion, everything is stable and 1 BTC is worth exactly 1 BTC. However that is not how the world for the next foreseeable future will be. There fore lets say I have 0 BTC and would like to buy an iPad. An iPad today is worth roughly 60 BTC give or take. So if I was to write get a contract for 5 BTC/hr I could earn myself an iPad in 12 hrs of work.

To my employer (who also loves ipads) 5 BTC/hr is a scam. To him, today 12 hrs of work ~= 1 iPad. However because BTC is so volatile, tomorrow 6 hrs of work ~= 1 iPad. To him its against his interest to spend BTC because tomorrow it might get more valuable and be worth 3 hrs of work ~= 1 iPad. This will cause BTC to become a commodity not a currency. Fortunately this is a limited commodity, so its essentially becoming a new unregulated global commodity market. And of course those who are early adopters are the real winners.

Also there is a security hole. While some will secure their BTC with insane encryptions and multi-factor authentication... not all do or will. Which means that you lose your bitcoin wallet, you are screwed. You get your computer hacked, you are screwed because your money just moved into someone else's hands. Unlike a bank, you cannot physically walk into a bitcoin office present your government papers (multiple forms of id) and get access to a lost wallet back. Encryption is irrelevant when simple phishing attacks can work just as well and since its a computer password, chances are that if you know one password for a person, you know his wallet's password.

Now a couple of points:

Just like the real market, there will be fraud everywhere. It is money after all. Just different kinds of fraud.

However unlike the real market, the layman will not be able to get the same level of security as current banking. Sure its not 100% secure. Maybe not even 70%. But at least if you put 100k in the bank, you have a fairly good guarantee that your money will not suddenly dissappear. If it does you will have legal measures you can take to get it back. With BTC... you are fuuuucked. See the article about losing 8000 BTC. Sure it was not worth so much at the time, but it is irrelevant. The fact is that it may have been worth 100 dollars at the time and 80,000 today. The person lost his money on a technical glitch.