1) The medium of exchange
2) The medium of account
3) Store of value
Money, being the medium of exchange, allows us to avoid barter where we trade one commodity for another. Barter is inefficient because it relies on the double coincidence of wants. If I want to trade a horse for a cow, I need to find somebody else who wants to do the opposite trade, exchanging the cow for a horse. In a monetized economy, on the other hand, I can circumvent this problem. All goods can be sold for money and bought with money.
Money is usually also the medium of account, meaning that all goods are quoted in terms of money.Finally, money is also a store of value, meaning that its price should not fluctuate wildly, i.e. money should have a stable value.
It should be immediately clear that Bitcoin does not fulfil any of these three functions. We do not buy or sell goods and services for Bitcoin, well, at least most of them. According to my knowledge a few items on the internet can be purchased with Bitcoins, but the range is rather limited. Furthermore, most goods and services are not quoted in terms of Bitcoin, but in terms of the domestic national currency. Finally, the value of Bitcoin has fluctuated wildly over the last few years, which makes it a purely speculative object.
I usually adhere to a principle where I do not predict bubbles because, as I have pointed out previously, because it's pretty much a fool's game. Here, however, I will make an exception. These cryptocurrencies definitely display bubbly behavior. To my knowledge, these cryptocurrencies can be used for criminal activities as they are harder to track than standard money. Initially, a lot of computer lot of computer nerds have also bought into the hype of "alternative money". These two factors combined can explain why the cryptocurrency has any value at all. It's because there is some demand for such an exotic product. The recent weeks, however, have been all about speculative frenzy. More and more people have seen the recent spectacular increase in the value of Bitcoin and now want to participate. A lot of the hype might be explained by how easy it is nowadays to spread a story via social media, Facebook, Twitter & Co. That's how I stumbled upon it. As the value of Bitcoin has only been increasing for months now, more and more people want be part of the success story. Today's crash should be a reminder that there is absolutely nothing that fundamentally ties down the value of Bitcoin. It's a purely speculative object, a bubble or even a Ponzi scheme, that will surely burst one day. I have no idea when, suffice it to say that there surely will be more fluctuations ahead. So enjoy the ride as a spectator, but don't buy into it. That's my advice, for what it's worth.