In a moment of some depression, reflecting back on sinking so much money into Bitcoin at close to the peak of its price history, I made this:
http://i.imgur.com/f3tIJwK.pngIt's important to understand that Bitcoin is dangerous to you, and you need to respect its danger if you decide to buy some. You need to be using a secure cold storage wallet. You need to not trust services like Coinbase to hold onto your coins for you.
Growing up, I'd always heard stories about people who kept cash under their mattress because they didn't trust banks to not lose their money, which made me laugh. Now I get to laugh at myself for trusting anyone but myself to not lose my money.
Usually, when you lose money, you get something in return. Even if it's just an opportunity. A risky investment isn't necessarily a bad thing if it fails, because you may have stood to earn a lot if it turned out well.
The key thing to understand about Bitcoin is that you can lose all your money in the blink of an eye for a multitude of reasons. I've written in detail about why Bitcoin is dangerous to its users: https://news.ycombinator.com/item?id=7521906
Until there are good and convenient solutions to these problems, it's hard to imagine Bitcoin as anything but a vehicle for speculation. And it's a fine one, too. If you feel like gambling, there's nothing like the rush of seeing whether you're about to gain $50 or lose $250 in the next two minutes. And waking up at 3AM to check the price. (Most of the heavy moving seems to happen in the US off-hours, unless a big news story impacts the price.)
The reason I say it's a vehicle for speculation right now is because right now the most sensible course of action for people who are risk-averse yet still want to accept Bitcoin is to immediately convert Bitcoins into dollars. Indeed, that's exactly what Tarsnap does, and probably many other merchants as well.
And about the price: it seems mostly determined by a small group of people (probably fewer than 100) who have a lot of coin and who actively try to move the market in their favor. They've been following a rather simple scheme: dump a lot of money into bitcoin to jump the price up $50 or so, then sit back while everyone else reacts by jumping it up another $50, then sell off your newly-acquired bitcoin. Presto, you've earned some money. Possibly quite a lot of money. I don't know whether that strategy has paid off for the movers, but nonetheless it seems to be what they're doing.
The long-term price is anyone's guess. I'd say the most valuable insight I learned throughout this whole ordeal is that the market isn't logical, or if it is, you aren't going to be privy to the information it's acting on. The most obvious example of this was when people sold off thousands of bitcoins an hour or two before Mt. Gox published their update with bad news. At face value, it seemed to be a clear example of insider trading. When it happened, no one knew why the market suddenly dropped so much; it was as if the market suddenly went insane and lost faith in bitcoin. In reality, it was probably someone with a ton of coins who caught wind that hard times were about to happen.
Bitcoin is an interesting experiment. I like it a lot. I think it has a lot of potential, and that we need to figure out solutions to the fundamental problems like making it easy for people to manage their own wallets without risk of loss or robbery.
