Bitcoin exchange rate reached $100 USD per BTC

Monetary economists have a measure called velocity, which is "the average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time. Velocity has to do with the amount of economic activity associated with a given money supply." [1] It can be thought of as the "rate of turnover in the money supply" [2]. It is a good indicator of the "health" of a currency.

The annualised velocity of the M2 Money Stock for Q4 2012 2 was 6.152 [2]. That is, the average dollar in the form of notes and coins in circulation (M0), traveller's cheques, checking account/demand deposits, savings deposits, time deposits/CDs under $100 000, and individuals' money market deposits was spent 1.538 times on economically useful activities in the fourth quarter of last year.

The annualised velocity of the Bitcoin Money Stock for Q4 2012 was 1.27. That is, the average Bitcoin in existence was transacted 0.32 times in the last 90 days of 2012. This includes economically useless transfer payments, i.e. transactions not involving the exchange of real goods or services, as well as economically useless hoarded or lost coins, i.e. Bitcoins not in circulation and so less a unit of "money" than a speculative asset (in the case of hoarding). Since this is a ratio, the two balance out, though it is still biased to the downside. For the 30 days ending on 29 March 2013, it was 1.86. Here is what it has been doing since February 2009 [3].

More encouragingly, Bitcoin Velocity has quadrupled YoY. M2 Velocity declined 4% over the same time. I would thus offer, very tentatively, that there is a substantial portion of the Bitcoin economy involved in real transactions (versus financial ones, e.g. trading on an exchange).

Curiously, yet to emerge (to my knowledge [EDIT: which was wrong]) is a majour vendor of Bitcoin mining equipment that accepts Bitcoin as a mode of payment. If that were to happen, the Bitcoin economy would have an endogenous "risk-free rate" in the form of mining yields, with power companies serving as the most salient factor. If it were not for the ceiling on the number of Bitcoins which can come into existence, it could very well have been the first currency pseudo-denominated in energy.

[1] https://en.wikipedia.org/wiki/Velocity_of_money

[2] http://research.stlouisfed.org/fred2/series/M2V?cid=32242

[3] http://imgur.com/f7oFZKb Annualised Bitcoin Velocity, Feb 2009 - March 2013

The deflationary nature of bitcoin is by design, yes, but the thing with cryptocurrencies is - if it's somehow unsucessful, people can either ditch the currency and make a new one, or if most of the miners agree by consensu, even change the bitcoin protocol with its deflationary nature itself.

For example, if the economy will be in such a terrible state thanks to the deflation, somebody can do a fork of bitcoin that will not have halved mining reward (and thus not having finite number of bitcoins in existence), and if the miners will jump to this new version (and probably clients, too, not sure about that), this new currency will be used as easily as the old bitcoin.

If I am wrong technically, please correct me.

The nice thing about bitcoin is - nobody enforces anything.

I like using seeds as an example, because they make a nice toy model. They last a long time, and more of them can be produced through capital goods (that is, other seeds) and labor alone.

In this model, seeds have no inherent depreciation, and our hero would have bought them from a seller, e.g. a storefront. In a deflationary environment, the nominal value of capital goods decreases, so anyone holding seeds, whether as inventory (the seed store) or investment (planted in the ground), would take a loss.

You are correct that, given deflationary expectations, fewer people would plant seeds. That is exactly what this scenario is meant to illustrate. Fewer people doing work is called unemployment!

And to your last question, let us say that seeds can be used as food. As seed suppliers drop out of the market, this inescapable demand for food will indeed drive their price up. Deflationary spirals do not terminate in starvation: equilibrium is reached, because of basic necessities. But the equilibrium is at a lower output level, and with higher unemployment.

I am not sure about namecoins. Nobody is developing namecoin for a year, there are bugs and security holes and tons of weird decisions in the design.

I don't know enough about litecoins to say.

Bitcoins are in a speculative bubble. This bubble is attracting fringe merchants, which provides a veneer of legitimacy to the dramatic speculative rise. Note that there is no way to effectively short bitcoins at this point, so there's no counterbalance to the speculation. When the bitcoin market turns south, it will fall hard as the shallow liquidity evaporates quickly.