There is a bit of a battle going on in the libertarian community about Bitcoin. The price of one Bitcoin recently hit $1,000, which is probably the reason it is being discussed to such an extent. Gary North recently came out with a scathing article about Bitcoin, or at least against it being considered money. There are also those who disagree with Gary North (see here and here).
If you search around the web, you can find many people taking positions for and against Bitcoin. It is not surprising that it is a hot topic in libertarian circles because most libertarians and Austrian school followers are highly critical of government fiat money and would prefer an alternative.
I think it is important to point out that the biggest disagreements are about definitions (such as the definition of money) and about the future prospects of Bitcoin. I haven't read or heard any libertarian who says that Bitcoin should be illegal or that it is somehow fraudulent.
While I tend to side more with Gary North on this debate, I can't fully support his initial arguments. I disagree with the use of the term Ponzi scheme. I don't really consider Bitcoin to be a Ponzi scheme. North defines Ponzi scheme in his article and it seems his definition differs from what most people would consider a Ponzi scheme.
Social Security is a Ponzi scheme. It relies on future participants to keep the system afloat. Bitcoin could technically keep being used if no new participants entered the market. While it would not likely survive, it is still technically possible. With Social Security, a true Ponzi scheme, the system would have to fail without future participants. It will probably fail even with participants. If Bitcoin is a Ponzi scheme, then so is a bad stock. I just prefer not to describe Bitcoin with this term, especially since it implies fraud.
My one other quibble with North is his use of absolutes. He is essentially guaranteeing that Bitcoin will fail.
While I think there is a high probability that Bitcoin will fail in the long run, I can't say that it is impossible for it to one day be widely used as money. As Austrian economics teaches us, human action is unpredictable. We can guess what humans are likely to do and how they will likely react to certain situations. But I can't be certain of what millions of people are going to decide to do.
Bitcoins became popular in Cyprus when people's bank accounts were being confiscated. If the Federal Reserve were to make some ridiculous announcement about expanding QE and the U.S. dollar took a nosedive, who knows what people will turn to? While I think gold and silver would be more likely to take hold, I can't say for certain that people won't turn to something like Bitcoin.
With that said, I am generally on the side of Gary North here in thinking that this is a massive bubble that is about to pop. I have no problem with Bitcoin and people investing in it. I am happy that people are trying to find alternatives to government fiat money. At the same time, I am doubtful that Bitcoin will last.
Despite what some Bitcoin defenders say, it is not a widely used medium of exchange. It is a medium of exchange with certain merchants and small markets. But try walking into Walmart and paying with Bitcoins. Try going to the grocery store and paying with Bitcoins. Try to buy a house with Bitcoins. Try to get your employer to pay you in Bitcoins. Try to make a long-term contract denominated in Bitcoins.
Actually, the last point is probably the biggest. Who would make a contract denominated in Bitcoins right now, unless the payment were immediate? Could you imagine a car dealership selling a car for 20 Bitcoins and giving a loan? If the Bitcoin market crashes, the car dealership could end up selling the car for 20 bucks. As North points out, there is no stability right now, which makes it a bad prospect for money.
There is a reason everyone is talking about the "price" of Bitcoins. It is all in terms of the U.S. dollar, which really is money. Libertarians may not like the fact that the dollar is money, but it is in fact the most widely used medium of exchange.
In conclusion, I have nothing against Bitcoin and I can't say that it is impossible that it will one day be widely used as money, but I have my strong doubts. I think the more likely scenario is that it is in a major bubble right now. It should be treated as an investment. The price may go up a lot more before it crashes. But bubble tops are hard to predict. We don't know how far they will go. If you are going to use some U.S. dollars to buy Bitcoin, then you should consider it a speculation and you should realize that it is highly risky at this point.