If Bitcoin isn't a relatively stable store of value then there is no sane reason to use it purely for exchange. If you're able to send dollars to Coinbase or MtGox and the end user is able to receive dollars from Coinbase or MtGox, chances are you can cut out the middleman and the liquidity risk by sending them direct, at similar or lower transaction costs. The equation looks a bit different if you're holding non-trivial Bitcoin balances, but you won't do that if it doesn't reliably store your value.
You're ignoring transactions where Bitcoin is exchanged for actual goods or services, or for non-monetary financial instruments like stocks. In such transactions Bitcoin doesn't have to be a store of value; it only has to be a medium of exchange. The same applies to traditional forms of money, which was my point.
It's true that there aren't many ways to exchange Bitcoin for actual goods or services or non-monetary financial instruments right now, but that's not due to any inherent inferiority of Bitcoin: it's due to the fact that governments and central banks have a huge incentive to either outlaw exchanges of Bitcoin for goods, services, or financial instruments like stocks, or at least impose artificial costs on such transactions that are high enough to discourage most people from making them. In other words, Bitcoin is not competing on a level playing field with other forms of money.
People won't accept Bitcoin for actual goods and services if they don't believe it will hold its value. Or more precisely, they will require you to pay x% more in Bitcoin (at current exchange rates) where x is a premium to account for the expected loss in value over the period they expect to hold the Bitcoins, plus a margin for risk. If that premium happens to be higher than the cost of transacting in an alternative currency, Bitcoin is useless as a means of exchange.
Personally I'd see "governments have a huge incentive to outlaw it" as a pretty major inherent inferiority in something purporting to be currency too...
People won't accept Bitcoin for actual goods and services if they don't believe it will hold its value.
The same applies to any type of money. Google "hyperinflation".
Also, how much of an effect this is depends on how long people expect to hold money in between transactions; see below.
they will require you to pay x% more in Bitcoin (at current exchange rates) where x is a premium to account for the expected loss in value over the period they expect to hold the Bitcoins, plus a margin for risk.
People do the same thing with dollars and other currencies based on the rate of inflation they expect, i.e., the rate at which they expect dollars to lose their value.
Also note that qualifier: "over the period they expect to hold the Bitcoins". In other words, people need enough cash to cover current expenses for some period of time; but that amount can be pretty small compared to their total wealth, and it gets smaller as technology advances and economies evolve. People used to get paid quarterly, so they needed enough cash for a full quarter's expenses. Then the payment cycle became monthly, and now many people get paid biweekly or even weekly, so they need to hold less cash to cover expenses. (More precisely, they need to hold less as a fraction of their total wealth.)
I'd see "governments have a huge incentive to outlaw it" as a pretty major inherent inferiority
It's "inherent" only in the sense that we're not likely to get rid of governments any time soon. Is that a problem with Bitcoin, or a problem with governments?
