That's because Bitcoins are relatively easy to buy and very difficult to cash out into real currency. Once enough people see how hard it is to liquidate their Bitcoins back to USD the realization will follow.
Actually, once you've been verified by an exchange (required prior to buying Bitcoins unless you do a private party sale), selling Bitcoins is easy; it's getting your USD wired/ACHed to your bank account that can be time-consuming. This is due to the legacy banking system, and not some problem inherent to Bitcoin.
EDIT: By the way, it's not "very difficult" to sell Bitcoins. If I want to sell a Bitcoin, I log onto my Bitstamp account, put in a limit order. When the sale is executed, I submit a short, pre-filled form for a wire transfer to my bank. I then wait a few days and the money is in my bank account, in USD. Not hard.
http://www.investopedia.com/terms/l/liquidity.asp
Part of the value of dollars as a medium of exchange is that the value does not fluctuate greatly from day to day or minute to minute. In the short term, you can rely on prices remaining fairly stable.
You make a good point, and my above explanation was a bit confused.
I think BTC faces both problems:
There's high volatility, driven by the current level of speculation and the fixed quantity of Bitcoins that exist on the market. This makes Bitcoin a fairly poor medium of exchange since it is unlikely to hold a stable value from one day to the next.
There's also (I suspect) poor liquidity, driven by the low number of people involved in the exchanges (compared to other assets and currencies). While it may be easy to exchange Bitcoin from a process standpoint, you may not be able to get a price sufficiently close to the last quoted price when you go to exchange for dollars. It may be more liquid than a house, but it is much less liquid than USD, EUR, GBP, etc.
Is my liquidity assumption mistaken?
US/EUR seems to commonly be around 100 billion or so a day.
Unless you're an investment banker, yes. There are multiple exchanges that handle daily volume in the 10's of millions USD, with order books deep enough that you could cash out millions of dollars worth of bitcoin without moving the price more than a few percent.
That's nothing compared to what Wall St or the city is used to, but it is plenty enough liquidity for all but the most well off individuals, and growing. When the Winklevoss twins get their bitcoin ETF to IPO, I expect these numbers to increase by orders of magnitude.
Also, none of that is counting the significant volume of transactions which occur non-public or off-exchange.
You're absolute (and obviously) correct about Bitcoin's volatility, but you're mistaken about its liquidity.
Bitcoin is quite liquid if you're in the U.S. and many other countries around the world. The only delay is the time required by the legacy banking system to wire or ACH funds in/out of your exchange account.
1) Bid Ask spreads vary by exchange and currency, but it seems that with the exception of BT China an MtGox, the bid ask spreads can be quite wide. Prices for BTC/USD also very a good bit by exchange, meaning the price a merchant sets might be influenced by which exchange they use.
2) The MtGox live chart seems to imply that an order of a few bitcoins (or a few thousand dollars) could have a profound impact on the actual price of BTC/USD. This does not seem particularly liquid to me, unless I misunderstand the chart.
It's only easy to buy a house for $100M if you have $100M you can spare for house-buying. And then you only get to choose from the rather limited range of $100M houses that are available for sale.
Similarly, you only get to sell a house for $100M if you have a house that nice to sell. And then you only get to sell to the rather limited range of people willing to buy a house for $100M.
But perhaps I've misunderstood. If you happen to have $100M burning a hole in your pocket, it's easy to buy a house that would normally cost $1M with it, because most people with $1M houses will happily sell them for $100M. But the parallel to that is that if you happen to have a house that would normally cost $100M, it's easy to sell it for $1M. Which it would be.
With the exception of Mt. Gox, this is simply not true. It's hard to both buy and sell Bitcoins if you've not been verified at an exchange, but once you do that (not very hard), it's equally easy to both buy and sell. The only delay is the time needed for the wire or ACH to arrive.
I get the feeling that many of you are talking confidently about something you have no experience with. Where are you getting the idea that it's hard to sell Bitcoins?
The only reasons it is different with houses is because people are emotionally invested in them, not all houses are equivalent (and thus their value is unique per house), and liquidity is hence really low, and market prices adjust slowly.
Bitcoins are worth a thousand dollars because people who own them are not willing to part with them for less, and people who are buying them are willing to pay that much. This is economics 101. You can always cash out at the market price, unless liquidity is low; the only time that happens is in a teeny market or a crash.
Bitcoins are a currency, there's no need to convert them. It's just happening now because some people want into this environment.
Yes, unless you want to, you know, buy something...
That bar/grill is a novelty -- and it probably only accepted BTC in the first place because there was a BTC EVENT held at it.
There's even projects that accept donations in bitcoins, you'll see wallet addresses like this: 1JBEGFXW6ywMtZnCbjvKGJXDtdR6g6KmMi
Their utility isn't tied to the fact that you can turn them into more of your favorite currency later, that stupidity is what's driving the current bitcoin bubble. Wait till people realize what you can do with them.
You need grocery stores, gas stations, clothing stores, and restaurants to start accepting it. Until then, it's really just a novelty for middle class college Libertarians.
Do you think that cryptocurrencies spring fully-formed from the forehead of Zeus?
Have you tried paying your taxes in Bitcoin? The IRS (or regional equivalent) is not going to accept bitcoin any time soon and they will want you to pay taxes on, for example, profits. There is a need to convert, don't believe otherwise.
Companies regularly complains that this costs them 1% or so of revenue.
Not yet.
Saying you're not supposed to convert bitcoin is the statement of someone who thinks bitcoin is NOT an investment. So... not a goldbug.
1. People stop bothering to follow the law, and governments throw their hands in the air and do nothing about it.
2. Governments start accepting Bitcoin for tax purposes.
I am not confident that either of these will happen...
Also there is some basic lapse in logic here. Just because a WoW nerd can trace the currency on a technical level, does not mean it is "easy."
Try buying an iPhone 3g right now on Craigslist. I bet it takes you all of two minutes.
Then try selling it. I bet it takes quite a bit more time.
Asymmetry.
Currently (and for the last years), the price of BTC has been rising implying that's actually easier to sell BTC than to buy? Moreover there are exchanges that are entirely symmetric (when opening accounts you do not need to qualify as a buyer or seller).
Asymmetry is a nice word but I don't see what's asymmetric here?