Bitcoin is a very interesting and complex phenomenon. It is having trouble gaining ground, but that is not because of problems inherent in the system, but rather because money is a complex and difficult subject which is hard to understand. I am a firm believer in the value of bitcoins, and am very excited about the phenomenon. I can't wait to get involved, and I intend to get involved. But the main obstacle to people getting involved in bitcoin is that people don't see its value because they don't understand it. This is because money itself is hard to understand.
Money is not a medium of exchange. It's more complex than that. Imagine a circle. The circle represents value. You can cut the circle up like a pie, and each section of the pie represents some kind of value. The angle of the cuts represents the current measure of which we value that value at the moment, and the points on the circumference of the circle represent the actual commodity which we value. The circle is a perfect circle, undistorted. The circle is what I would call a coin. If you have a circle of a large size, it means that you can fit more points on the circumference, and therefore buy more things. If it's smaller, you can buy less things. This is the definition of money.
Notice that it is a unit of value, in all the complexity of the term. It is not, and I repeat, it is NOT a medium of exchange. Here is what a medium of exchange is. Suppose I pick a few pieces from the circumference of the circle — things that I value. But I don't value them as much as someone else might. And I happen to know of a person who does value these things, but this person has a certain set of things on the circumference of the circle which he doesn't value as much as I do. My circle is currently oblong, with a little bump on one end, and so is his. It just so happens that if we trade these inconvenient items we don't really want for each other, we will have more of what we want and less of what we don't want. Then the bumps on the circle will be more evened out and the situation more fair. This is a trade.
The coin itself is not a medium of exchange. If you really think about it, you'll notice that the coin is simply a measurement of the value of our society at the moment, including all the various things that we value. The coin, in the case of the example above, has lost a little bit of value because of the overabundance of things we don't want in the cases of two parties. The exchange itself has the function of increasing the value of all things involved, including the coin. It is the exchange, therefore, that gives value to the coin, not the coin that gives value to the exchange. In other words, the coin doesn't mediate the exchange, cutting costs and increasing value. If the coin did that, it would increase the value of the exchange, and be a true medium for the exchange. But instead, the coin is one of the things benefited by the exchange. Therefore it cannot mediate the exchange.
The reason why people say the coin is a medium of exchange is because dollars and coins are nice ad-hoc ways of mediating exchange. We can say, thing X is worth $10 per item, while thing Y is worth $5 per item, therefore it would be fair and even if you gave me two of Y for my one of X. But you don't need money to regulate an exchange like this. All you need is some placeholder to measure value. The placeholder measures the relative angles of the two pieces of pie cut into the coin for both things X and Y, but it is not the whole coin itself. It is closely related to the coin, because without the coin you wouldn't be able to cut pieces into it, but it is not the coin itself.
So what is the actual medium of exchange? It is all the things which allow a line to be drawn between one slice in the pie and another. The New York Stock Exchange as an institution is a medium of exchange. It mediates the exchange between things of value. That complex and difficult concept we call the "open market" or the "free market" is a medium of exchange. But neither of these things are actual money, though they do indeed have value.
What this all has to do with the bitcoin is this. The bitcoin is actual money, not a security or anything else, as some people claim. Bitcoin is currency. You can imagine a coin similar to the one I envisioned above representing the coin in relation to the bitcoin economy, with little pieces of the pie cut up for things that bitcoin holders / users value. And, the coin itself has value, just like money. So why should we use bitcoins instead of dollars? The answer is fairly simple, though I will explain in the next post. The actual thing coined into physical currency that we are using as money is different. Dollars are made of paper. Gold coins are made of gold. Bitcoins are made of data and algorithms.
These physical / pseudophysical substances have inherent differences, which mean each one is better at certain things and worse at certain things in relation to each other. Bitcoin is better at certain things than the dollar is, and worse than certain things than the dollar is. Similar things can be said for every kind of thing that is used as currency. The reason why certain kinds of people should start using bitcoins is because the constellation of value relationships of the coinage itself for bitcoin happens to be inherently better suited to skilled artisans, shopkeepers, small business owners, etc. which make up the real substance of the middle class, whereas the constellation of value relationships of the coinage for the dollar is better suited for the upper and lower classes. I will outline what I believe to be the main differences in the following post.
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