At present, Bitcoin is a good way to transfer money, trade and speculate on the value of money, and store money. It is not itself a money, not yet. If we want it to be a money, here’s what we need to do. First, a bit of background.

Here’s an exercise. Hold a dollar bill in your hand, or $5 or $10 or whatever, or a euro, or a £5 note. Think about what you’re holding, and think about why it has value. Hard money libertarian types often like to say things like “The Dollar has no intrinsic value,” and that’s kind of true. But let’s sharpen that statement and try to figure out where exactly whatever value fiat money has, comes from. Certainly it has some kind of value, but from where does that value stem?

At bottom, a dollar or euro or pound has value because we must pay taxes in those currency units to our respective governments, or we will go to prison. People within a given government jurisdiction use the money that their government accepts in payment of taxes. Flowing from that, the fiat money is able to be used in payment of any debt, which makes it a money. If someone does not wish to accept it and would rather be paid in gold or bitcoin, assuming this is a legal transaction where the authorities can be called upon, he will be forced to accept payment in fiat money or go to prison. The academic way to say this while hiding the violent implications of force is the term “legal tender”. If we take this to its logical conclusion, if any person refuses to pay taxes in the required fiat currency or refuses to accept a payment in fiat currency and decides to actively resist going to prison, he could even be killed, depending on how he decides to fight back the authorities trying to detain him. This is of course a very bad idea.

The value of any fiat currency, therefore, stems from the desire of the average human being not to be imprisoned. So hold that dollar bill in your hand again now, or the euro or the pound. You are holding in your hand the implicit government threat to imprison you or, if you’re crazy enough to fight back, even kill you. The value of a dollar therefore is extrinsic. It is always based on an implicit threat against you outside the body of the paper itself.