'What is the value proposition for consumers apart from sending money to friends? That's valuable, but it's not multi-billions of dollars worth of valuable'
It isn't? Western Union makes $5 billion in revenue every year. PayPal - and a reference to sending money to friends is literally the name of the company - also makes $5 billion in revenue every year.
Exactly, it is mostly a solved problem. The question is, what value does Bitcoin add (for the average customer not interested to buy narcotics on Silk Road) and what is the price for this, for example unsolved security issues and large price fluctuations during the early adoption phase?
Transportation was a solved problem when horse carriages were invented. Every solved problem can be solved even better. Isn't that what most startups are about?
Let's be more general. Set A = stuff you can buy with USD. Set B = stuff you can buy with BTC. Set W = all stuff. Set A will always be a subset of set W, and is getting to be a smaller subset every day. Set B will in the future be an exact match for Set W. Which unit of account would you choose? A or B?
Assuming you meant set B with set C - what makes you believe set B will match set W one day? Especially right now set B is incredible tiny compared to set A and there is not much incentive to switch to B which in turn makes it unlikely that set B will quickly converge to set W.
Except Bitcoin makes it free to send money to friends. One way I could see this being financially viable to build a company around is if lots of people are storing money in the company's webwallet. Then the company could invest customers' money, like a bank. But if you are using a webwallet like Coinbase, then you are asking to get screwed out of your money, since there are no FDIC protections.
Its free if you have bitcoin and your friend wants bitcoin. Once you bring other currencies into the mix it is often more expensive to comparable services and just as slow if not slower.
