Let’s try casino chips as an analogy.
If you go into Harrah’s, you *can’t *bet using dollar bills. They won’t let you. You cannot play with dollars because the other party you want to play with, namely the house, says you can’t. It takes two willing people to make a trade.
But they *will *“sell” you chips labeled 1, 5, and 10 in exchange for dollars with Washington’s, Lincoln’s, and I-forget-who’s pictures on them. And they *will *let you gamble with those chips.
So *if *you want to gamble, *that’s *why you want Harrah’s chips. Not because chips are “better” in some sense than dollars or Euros. But because chips let you play a game you want to play. Or said another way, because chips let you buy the entertainment you want.
So now let’s say you play a while, exchanging chips for entertainment & maybe a low-quality drink or two. And eventually you decide you’re done.
You *can *take your chips home but you *can’t *spend them at the grocery store; the grocery store *won’t *take them. Again it takes two willing participants to make a trade. And they aren’t willing because the Federal & local government has prohibited them from being so.
But you *can *take your chips back to Harrah’s and exchange them for bills with Washingtons, Lincolns, and I-forget-who’s.
So the existence of Harrah’s chips is useless to you *unless *you want to gamble at Harrah’s. And if you *do *want to gamble at Harrah’s, then they’re absolutely essential.
With all that background, now let’s try btc: I want to sell my cocaine without a way for governments to track the flow of money. Somebody has conveniently set up this thing called btc that lets me do that.
All I need is for a buyer to agree to use the same payment system: btc. The drug buyer spends dollars to get btc, sends the btc to the drug seller. The drug seller gets the btc, sends the drugs, and then converts the btc into dollars again.
The drug guys like btc because they believe the anonymity and portability make this method of moving value more safe than truckloads of US100 dollar bills. Or checks sent through the traditional financial system that can be traced by law enforcement.
Once the system gets bigger, then drug sellers can contract with drug transporters or drug manufacturers to also trade using btc. Buyers can do the same thing, paying for more and more of the total logistics chain from say, coca farmer to street user wholly within the btc world.
And if some people can be persuaded to use btc for legitimate transactions, so much the better. If the Ferrari dealership will take btc, then the drug seller has another way to use his hard-earned btc, leaving the Ferrari store to mess with converting them to dollars. But maybe the Ferrari store’s landlord will also take btc … etc.
In this way more than one currency can exist in a single geographical area. In much of the Third World there are two currencies in use: the local one, and US dollars. Folks can pay with either or be paid in either. Whenever both parties are willing. And usually the local government is not real happy about this and tries to stamp out using other currencies. With varying degrees of success. Usually the stronger the motivation of the citizens to escape their local currency’s problems, the harder the local government is trying to keep people trapped in the local currency.
You can look at the success or failure of btc as essentially being the mirror image of the success or failure of anti-money-laundering efforts in real-world currencies. The fact btc seems to be working for now indicates (to me at least) that the various governments’ efforts to stamp out drug and terrorism money flows is working enough to hurt the illicit folks enough to motivate them to make btc work. So far.