As I've been reading and reading and reading about Bitcoin, the nagging thought in the back of my head has been: how can I (if possible) use this system to pay for those core things that I need to live, such as groceries and rent. The answer to that, in my mind, has been that I will, at the end of the day, need to convert BTC to USD in order for the BTC to basically "interface" (for lack of a better term) with other, more widely circulated currencies; basically the currencies that we use day to day. That is, I imagine, where an exchange comes in.
It will be awhile (years) before Bitcoin is widely accepted enough for you to no longer need traditional currencies. Most of the early adopters are people who are either technically-inclined or are fed up with the way that government-backed currencies are being manipulated. It's really just a big experiment at this stage, albeit one that many people are putting a lot of effort and faith into.
My biggest concern has been the trustworthiness of the exchange, but I think I've been considering it all wrong: I've been thinking of exchanges as, essentially, banks that have a quantity of money and I pay them, then they pay me in Bitcoins. There is, of course, the concern for fraud, which is one of the things that BTC is trying to create a system against.
This is one aspect of the experimental side of Bitcoin. It's a social experiment in a lot of ways. Since Bitcoin transactions are irreversible, the person sending Bitcoins has to place a lot of faith in the other party. They can't just call up the Bitcoin bank and cancel payment. There will be a larger use of escrow with Bitcoins than with traditional payment methods. However, you can choose whether or not to utilize escrow rather than subsidize the cost of fraud protection for everyone, which is how credit cards and checking accounts work today.
But am I thinking about it wrong? Do these exchanges purely facilitate the trade of Bitcoins-to-USD/CAD/EUR/whatever between the users? So that I go to, for instance, Mt. Gox, put a proposed exchange, and then I'm contacted by the user with the appropriate currency to then do the exchange, and everything is done directly so that there is no intermediary that acts as a bank to hold money for me (or anyone else) to withdraw from? Or is it these services that act as escrow, essentially?
In the case of Mt. Gox, all funds have cleared by the time offers are placed on the exchange. So whether you're buying or selling Bitcoins, you can rest assured that the matching funds are there. The trust you place is in the exchange operator. You trust that you will be able to withdraw your funds once the exchange is complete. There are also a lot of individuals who do exchanges (myself for one). In fact, a lot of us believe that the best way to facilitate exchange is for everyone who holds Bitcoins to offer to do exchanges. After all, one of the strengths of Bitcoin is that it is decentralized, so why would we want to rely on a centralized exchange?