Money has nothing to do with Government. True money exists outside of government control. Gold was used as Money long before Governments made use of it. Government's initial role in coining money is simply to regulate a common rate of exchange. If it had Ceaser's mark on it then you knew it weighed so much and thus had a fixed value. Gold can't be counterfeited, it is still gold even if you melt it down.
For something to function as Money it must have 3 things. (This is not MY definition it is economics). It must serve as a medium of exchange, a unit of accounting, and a store of value.
Note for ease of conversation I am going to use Bitcoin and Dollars. In most cases, you can substitute other DC money and other local currency.
Bitcoin or other DCs are not a medium of exchange. Not everyone takes them, few are prepared to take them nor is that really likely to change. Dollars, Euros, Pounds, etc. all serve this function bitcoin does not nor is it likely to because there isn't anything wrong with Dollars performing that role. No one here is going to refuse a Dollar. It may have it's problems but it is universally accepted.
Bitcoin is not a unit of accounting. People do not calculate their wealth in Bitcoin. They do not post prices in bitcoin. They do not keep their ledger's in Bitcoin. And people who hoard bitcoin know the exact value in Dollars and here in the US you are taxed and expected to pay your capital gains taxes you earned selling Bitcoin in Dollars.
And finally, it is not a store of value. While you can criticize the Dollar for dropping in value due to inflation it doesn't thrash about fluctuating wildly in a single day. People save money with the expectation that it will more or less be of same purchasing value when they need it later. You can't do that with Bitcoin. Nor can more Bitcoin be created as needed, in the form of loans, when there is a higher demand for it. The numerous banks, for all of their many faults, DO provide stability to the buying power of money. Bitcoin, by DESIGN, can't do this and thus it NEVER can be money.
I understand your point and I agree that no digital currency is presently anywhere close to universal acceptance. It's been only a few years since its inception though. It would be unreasonable to expect that it could become so established in such a short time. It does however have huge potential and acceptance (of Bitcoin at least) is moving at an incredible rate. In a few countries it is already fulfilling a currency role, replacing a failing or waning fiat currency.
I totally understand your point of view though -- it's exactly what I thought when I first read about digital currencies. I couldn't understand how some made-up 'tokens' -- mere numbers in a computer -- could ever amount to much. Seemed to me like a scam even, but I was intrigued by the concept.
I think it takes an almost philosophical view point before you begin to understand why the technology is such a big deal and potentially world-changing. You have to forget your preconceptions and really think hard about what money and wealth is. Go back to basics and think about how and why we need a monetary system and the function it plays. For example, you talk about the 'value' of gold. Think about that for a moment. Why is this particular metal considered valuable? Aside from its decorative value, is it really that special?
Gold is considered valuable because we have all agreed that it is -- really, that's all. The scarcity of it helps and markings like Ceaser's stamp or hallmarks only serve to verify authenticity, just like the watermarks and ID numbers on banknotes. I think the turning point in understanding why digital currency is no different is when you realise that gold, cash, numbers in your bank account .... they're all the same ... a measure of your wealth or how much you are 'owed'. No matter what system we adopt, what matters most is that the central ledger that keeps tabs on everyone's wealth is reliable, trustworthy, incorruptible and stable. We're certainly not there yet with digital currency but it has the potential to fulfil all of those requirements better than any other monetary system.
The fact that there is a finite limt of Bitcoins out there is a big issue. Just as it has hit the $1000 mark like it did before, it can and will drop back down to a few $100.
Remember that gold is also in finite supply.
Well, time will tell which way the price goes, though it has been rising very steadily for the last couple of years. Stability takes time and, perhaps unsurprisingly, all new cryptocurrencies fluctuate wildly to begin with. But, for Bitcoin at least, the charts indicate an ever increasing stability.
I think you misunderstand the reason for the limited supply though. The Bitcoin blockchain was designed that way
intentionally (to mimic gold) -- not all cryptocurrencies are in finite supply. A finite supply (of anything) has the exact the opposite effect; it tends to cause an increase in value, not a drop.
It's all self-regulating and quite ingenuous when you think about it ... let me try to explain: 'Miners' attempt to discover new coins by solving complex mathematical problems. The value of their 'discovery' is initially set by their overheads and the ease in which they are able to discover new coins. Because there are many miners, competition limits profit, setting a value a little above what the coins cost to compute. As time goes on and the number of coins left to mine reduces, their value gradually increases. But every few years the complexity automatically doubles, halving the 'reward' or profit that the miners can make, effectively regulating prices and the supply.
For a better explanation than I can give:
https://en.bitcoin.it/wiki/Controlled_supply
This is a difficult concept to get your head around, but think about this: An ideal currency should be finite and have no value. By which I mean, the physical currency itself, be it coins, gold, whatever should be valueless. I'm not talking about the value it represents. The value it represents essentially makes it an IOU. The value of that IOU should, ideally, remain fixed. What you're owed should not change but because of inflation/deflation it does. Governments print/make new money, devaluing your IOU, effectively taking money from you in much the same way as share dilution reduces the value of any shares you may hold, giving it to the new shareholders. Any new currency has the same issue initially. You have to find a way to gradually distribute and introduce the currency that allows the value to remain stable while it grows.
