| | Money is a commonly accepted medium of exchange, which developed as a way of overcoming the double coincidence of wants inherent in barter -- of finding something that other people will accept in exchange for something that they have that you happen to want. Given the limitations of a barter economy, which involve the relative difficulty of finding trading partners, people sought to acquire a medium of exchange -- something that many if not most people considered valuable for its own sake and which they would be willing to accept in exchange for whatever the buyers happened to want.
Cigarettes were used as money in prisoner of war camps and were considered valuable even by non-smokers, because they knew that other prisoners would accept them in trade for goods and services. But in the larger economy, gold and silver became the money of choice, because these metals were more durable than cigarettes and other perishable commodities, and because they were of homogeneous quality and possessed a relatively high unit value. Paper money developed only because originally the paper served as receipts for gold and silver, which were the actual money.
Once people became accustomed to trading paper dollars in lieu of the precious metals for which they were simply receipts, it was easy for the government to outlaw gold and silver as money and institute a paper fiat currency along with coins whose content had little intrinsic value. Since people were already accustomed to trading the paper dollars, they continued to accept paper in payment for goods and services, because they knew that other people would accept it in payment for their goods and services.
For digital currency to be effective, it would have to become valuable in the same way, since people would be willing to accept it in payment only if they were confident that other people would in turn be willing to accept it. For digital currency to be viable as a commonly accepted medium of exchange -- i.e., as money -- it would have to become as popular as regular money is today. I don't see that happening, even if it acquired a kind of cult status among a certain segment of the population, in which case, its use would be rather limited. Of course, in a free society, people could accept whatever they wanted as payment. But I wonder how many merchants would be willing to accept digital currency. They would have to be confident that their suppliers would accept it, who in turn would have to be confident that their suppliers would accept it, and so on. I'd be very surprised if it becomes popular enough to be a commonly accepted medium of exchange.
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