My main issue with this solution is that it takes the decision out of the user's hands. Granted, in some cases it is potentially beneficial to unmask the password, but I would not want a site to assume that I'm okay with this approach. Imagine if you have to type in a password presenting in front of a crowd of 100 people. Do you feel secure with this solution?

Whatever solution you implement, it's important to give the user explicit control to override the mask.