bitcoins are certainly very alluring, especially to one such as myself who is concerned with privacy and finances. bitcoins allow a person to make anonymous transactions with a digital currency. It is generally used (as of now) for trading drugs on places like the Silk Road, a TOR hidden service, but is also used for more legal transactions as well. bitcoins have been gaining popularity for a short while now since their inception, but unfortunately bitcoins will not be able to survive as a currency because of the issue of hoarding.
In fact, despite bitcoins huge surge in popularity, bitcoins have been made out as a way to make money, rather than to trade. In other words, instead of being used as a currency, bitcoins are today mostly seen as (and traded as) an investment. The reason for this is that the value of bitcoins, in terms of USD, has been skyrocketing at an exponential rate. In July 2010, after the website Slashdot ran an item that introduced the currency to the public (or at least the public enthusiastic about new technologies), the value of bitcoins jumped tenfold in five days. Over the next eight months, the value rose tenfold again. Many people came to view holding Bitcoins as a way to make a quick buck; 1 dollars worth of bitcoins now would be worth 100 dollars in just a year. As a result, many—probably most—Bitcoin users are acquiring bitcoins not in order to buy goods and services but to speculate.
The problem with having the Bitcoin economy dominated by speculators is that it gives people an incentive to hoard their bitcoins rather than spend them, which is the opposite of what you need people to do in order to make a currency successful. Useful currencies are used for trade, that's what makes them successful. But if you buy bitcoins hoping that their value will skyrocket (as anyone investing in bitcoins would), you're not going to be interested in spending those bitcoins, because if you did you would then lose out when the value of bitcoins rises. Instead, you're going to hold onto them and wait until you can cash out.
The way bitcoins are designed makes them conducive to this sort of thinking. Bitcoins are permanently limited; there will never be more than 21 million bitcoins in existence (The total number of coins is a result of the system's initial rules governing how many bitcoins miners could earn, and how often). Bitcoin's limited money supply is what makes it so attractive; the currency cannot be debased as money can when central bankers print more of it. The flip side is that if the demand for bitcoins rises, for whatever reason, then the value of bitcoins will necessarily rise as well. So, if you think that bitcoins are going to become more and more popular, then—again—it's foolish to spend your bitcoins today. The rational thing to do is hoard them and eventually sell them to new users. But that means there will be fewer bitcoins in circulation (and more in people's virtual wallets), making them less useful as an actual medium of exchange and making it less likely that businesses and consumers will ever see bitcoin as legitimate.
This problem is compounded by the fact that bitcoins are not spent for living. We already have a government backed currency that we can use, so spending bitcoins is not necessary. This means that a person can hoard their bitcoins as much as they want and only spend them once their price has jumped to a peak point in it's volatile price compared to the US dollar.
Essentially, bitcoins are not conducive to a spending environment, and as such cannot ever become a popular form of currency. Likely bitcoins will eventually die off and only ever be used in illegal transactions and by diehard bitcoin fans.