I don't understand why someone would hold a large amount of money in BTC. The only real value i see for BTC is in secure online transactions. Basically a 'last mile' currency that should be used much like cash. So having some money in BTC would make sense (say < $200 US) just for the convenience of secure online purchases. But why would someone transfer a large amount of wealth into BTC? It seems like the digital equivalent of stuffing your money into your mattress. Am I wrong on this? is there some major benefit that im missing?
Because to many people it is not the digital equivalent of stuffing money into your mattress; it is the exact opposite. It is the digital equivalent of investing.
Hell its not even the digital equivalent of investing. It's just plain old investing. (Or speculating, you might say)
What you're saying is currency speculation is usually safe.
You should be familiar with the old tradeoff- safety (aka risk) vs reward. Traditional currencies do not fluctuate very much. Bitcoin does, and being a fledgling currency, has the potential to explode in value.
bitcoin represents a set of capabilities that haven't been combined before. People believe that the market hasn't discovered the correct market price for this set of capabilities yet.
There has been some criticism of bitcoin's technical aspects. I just wanted to post a thought I've been having for the last week or two, given your great answer (perhaps you could respond):
If someone creates a better cryptocurrency than bitcoin, they should lock in a 1:1 exchange with bitcoin - so give 1 bitcoin and get 1 of the new currency back. At any time, one can recall bitcoins with the new currency at the same 1:1 rate. This way current bitcoin holders don't lose out to the new currency. There might be a minuscule commission to the creator.
One issue in uptake is trusting the issuer of this new currency to stick around to make good on their promise.
One weakness I see with bitcoin is speed of transactions across the network.
There is a centralized aspect to it, a fixed-rate exchange. Sort of like having Mt Gox lock in an exchange rate and promising not to shut down and being on the other side of all trades.
the distributed ledger means that you don't have to trust anyone to perform a transaction. bitcoins act as digital bearer bonds in the same way that cash does in meatspace.
In addition I can securely store an encrypted file containing my private keys on several cloud services and access it from anywhere in the world. If done correctly, it is possible that no one knows that I have this asset until I try to cash it into a national currency.
That's just bitcoin itself. The bitcoin protocol opens up the possibility of all sorts of distributed and secure interactions, contracts or property titles for example. namecoin is a distributed DNS service based on this idea.
Banks are annoying, but they provide an extremely valuable service (deposit insurance) and interest, which is why people tend to store wealth in banks. Are there any similar institutions for BTC?
You are fixated on deposit insurance. The folks letting lots of cash float in Bitcoin are not using it as a bank. You need to shift your mental thinking from banks. "Investing" in BTC can probably be likened to stocks more than banks.
P.S. The concept of deposit insurances does not hold much meaning with Bitcoin. Deposit insurance applies to banks, which hold on to & handle your money. Bitcoin is money. Now, if a Bank of Bitcoin was founded, because maybe you are afraid your PC will get hacked, and you deposited BTC with them, then deposit insurance would be meaningful.
Banks have deposit insurance because they operate under the fractional reserve system and loan out almost all of their deposits, putting them at risk of failing and losing all your money. Hence FDIC and whatnot.
The bitcoin network doesn't do that, hence no need for FDIC. The apparent risks to the BTC network are that a malicious entity gains control of > 50% of the network's computing power and uses that to illegally modify the blockchain, or the network goes down. The network is so big now that only the largest botnets would have a hope of the former, and it would take a global calamity like a scorched earth world war, asteroid, or EMP from an intense solar flare to accomplish the latter.
