BitCoins - a real, alternative currency with a market?

Bitcoins definitely have a huge draw for the underground.

Of course, if governments persist in creating undergrounds...

BitCoin is certainly a real currency in the sense that it is traded by people, even in exchange for real goods and services. As for whether it is something to watch depends on where you're coming from.

The problem of BitCoin is that of adoption. The US$ is a viable currency because the US government is able to force a US$-denominated debt onto people via taxation. This creates demand for US$, which causes people to offer goods and services in exchange for US$. Of course, once a currency is established, the circular/recursive reasoning of "you work for US$ because you can use them to buy groceries at your favourite supermarket, because the supermarket must pay its suppliers in US$, because the suppliers pay their employees, i.e. you, in US$" largely takes over. Take the base case of enforced debt away and the currency keeps working a while longer in Wile E. Coyote fashion, but at the first sign of serious doubt as to the currency's value it will inflate into worthless paper, even when the "total amount" of paper remains unchanged.

There is nobody who can force BitCoin-denominated debt onto anybody, and so it's unclear how BitCoin could ever take off. It certainly has appeal to a fringe group of libertarians, but I see no mechanism by which it could possibly spread beyond that.

It is true that BitCoin has some appealing feature through its distributed nature. Making small transactions between peers easier is definitely appealing - it's what makes services like M-PESA sell like sliced bread. However, BitCoin has the enormous disadvantage of not being convertible to US$ in the sense that when you want to use BitCoin, you are dealing with exchange rate risks. I would bet that this makes it too inconvenient for the majority of the population to ever take off.

We can spin this further and ask what would happen if, despite all difficulties, BitCoin would ever find widespread adoption. If all prices are denominated in BitCoin, then the exchange rate risk is no longer a problem for average people. But then the economy would face the same problems that plagued gold-based economies, in particular frequent recessions. The historical cycle of monetary development would be likely to repeat itself: People would start introducing paper moneys that leverage BitCoins, frequent bank run would happen until the establishment of a new, BitCoin-based central bank. Eventually, convertibility of the new de facto currencies to BitCoin would be dropped, reverting to pure fiat money.

From a public policy perspective, it is desirable to skip that cycle and just stick with fiat money. Most likely though, the question won't even come up, because BitCoin cannot really gain traction without government intervention in the first place.

From a hacker perspective, the more interesting question is: What problem do people actually face in their daily lives? I am sure there are payment-related problems that can be fixed, but my feeling is the solution is more along the lines of M-PESA, working within the currencies that people are already used to.

From a monetary economics perspective, it is an interesting experiment that may one day be used as empirical evidence for one or the other theory on money.

Raid what? There is no central authority with bitcoins that can be shut down. They could go after exchanges I suppose, but exchanges aren't really necessary for there to be a functional economy built around bitcoins.

I was about to post the same thing. However, the USA is not the only jurisdiction in the world -- are there others that would allow something like this?

There's always something to raid. Someone is hosting bitcoin.org, developing the client, etc.

The government hates competition.