Bitcoin is going up in price because people believe it will be used as a medium of exchange and store of value. If they realise this wont happen it will collapse in price. So lets look at these two aspects.
1) Medium of exchange.
Bitcoin is only a medium of exchange when merchants accept it and hold onto it. Right now merchants are dumping bitcoin for dollars, so its not being used as a medium of exchange. This btw. also throws the transaction cost benefit argument right out of the window (spread).
Now will merchants ever accept bitcoin and hold onto them?
No.
Why?
a) Governments have already effectively made it impossible for people to use bitcoin as a medium of exchange, as they expect taxes to be paid on bitcoin gains. Thus it cant function as a medium of exchange (same goes for gold btw.). Unless Government loses its control on its money monopoly this law wont be altered.
b) Governments will prohibt merchants from accepting bitcoins. Again: They will never give up their monoply on money.
2) Store of Value
After people realize that merchants are not adopting bitcoin and that it is not used as a medium of exchange, it will collapse in price. Will anybody store significant wealth in Bitcoin after this spectacular collapse? Not likely.
Also Bitcoin is a technology, that can be outcompeted by other altcoins. Your wallet can be hacked. The average citizen cant judge if the code can or can not be hacked and thus more bitcoins created. If you want to store wealth over a long period of time investing in a technology is not the best and easiest option. Also Bitcoin is not useful or wanted. If you ask a Bitcoiner what can I do with it they will say: dump it on the next guy it will go up in price! Gold and Silver where always wanted (jewlery and nowadays industry) and thats why they became MONEY in the first place! They have unique properties and everybody love to hold them in their hand. This will always be the case ensuring significant value and acceptance. Nothing like this can be said for bitcoins. Thus I dont believe bitcoin will function as a store of value in any significant way.
Conclusion:
I predict bitcoin to collapse in price (as it wont be used either as a medium of exchange nor as a store of value).
EDIT: The price increasing shows bitcoin is used as a speculative vehicle. It does not demonstrate bitcoins viability as a store of value or medium of exchange.
(Additional line of attack for governments: Government could come down hard on miners. They could make it illegal to mine bitcoins. Then bitcoin will lose all of its advantages compared to alternative cryptocurrencies. It will be a code like the rest of them.)
1) Medium of exchange.A medium of exchange, is simply a platform (currency) used to exchange value. Bitcoin is a unarguably a medium of exchange as it is, however you are right in your conclusion that bitcoin currently is too
volatile to be used as both a Medium of Exchange AND as a Store of Value. Traditionally, currencies have been used as both, because it is the norm, and it is a functional system. However, with a system like bitcoin in effect to cover one aspect, and temporarily another system, like the US Dollar, to cover the other aspect, you have a functioning system that operates just as well, if not potentially better.
a) Governments have not effectively made it impossible for people to use bitcoin as a medium of exchange. You are expected to pay taxes on bitcoin gains, as you are expected to with any capital gains. It is the same percentage, and it is the same laws that bind you to your rights through law. This is how the world works.
b) Governments
won't prohibit merchants from accepting bitcoin. If you knew the first thing about in-depth politics, you would know that the stake is too high. Effectively, the government is controlled by the people. We are the voters, no matter how corrupt the system inside might be. If bitcoin grows exponentially, it will gain a massive fan-base and world-wide admiration as a new technological wonder. If the USA (example) were to ban the use of bitcoin for merchants, the decision alone would be widely regarded as a direct confrontation of the entire publics belief, and thus politicians will grasp at the opportunity to use pro-use of bitcoin as their marketing plan, and easily win the election come next term. The USA knows better than to put themselves up for risks like this. There simply is not incentive to block bitcoin for merchants, nor will there ever be.
2) Store of ValueThis entire point is now made invalid, considering the explanation above.
As for bitcoin as a technology, it can indeed be outcompeted by other altcoins. This is where the open, free and democratic aspect of cryptocurrencies come in to play. It is the foundation of any healthy system. However, i find it extremely unlikely at this point, that any type of altcoin will surpass bitcoin in momentum, unless something comes along with groundbreaking new features that simply out-compete bitcoin by a massive margin.
Your wallet is as absolutely safe as you would like it to be. With the continuation of development on bitcoins infrastructure, which is an ongoing project, we all aim to make the use and adoption of bitcoin less time consuming, easier, safer and less demanding in general. Assuming bitcoin will fail because "your wallted can be hacked" is simply ridiculous.
As for bitcoins actual value. There are a ton of people who assume bitcoin has absolutely no intrinsic value, because it is not "directly backed by anything" - However, most of these people are technologically incompetent people who do not realize the
true value of information technology and it's respective system. The platform, the system, the blockchain, is what has value. The very core of bitcoin's structure, and it's ever-increasing infrastructural development, is what contains value. Does not the city of New York hold value? Of course it does. Does not Facebook hold value? Of course it does. They are two widely different "businesses", in that one is purely material and the other is not, however both hold value in their own way. - Just because bitcoin does not hold "traditional intrinsic material value" does not mean it is not backed by something. Another argument some people make is that bitcoin is only worth what people belive it is worth, and thus it is worthless. This argument is flawed beyond reason. The more infrastructure and general development bitcoin gains, the more people believe it is worth, and thus the volatility will even out and stabilize somewhat over time. It is not until we reach the "equilibrium price" that bitcoin can truly 100% stabilize as a modern, global currency, though. Rome was not built in one day.
ConclusionI predict bitcoin will continue to fluctuate from week to week, however continuously growing in the long-term, both through price as well as infrastructural development and wide-spread adoption. There will be times of growth, and there will be times of decline. However, in the long hold, bitcoin will revolutionize the world of economics, and will either be the precursor to, or the main content of, a completely changed financial system.