[stephen_g]

That's not true for all currency. Because Governments generally require taxation to be paid on property/transactions/income in particular geographical areas exclusively in a particular currency, there is a baseline demand which means that such a currency has some fundamental value despite not having "intrinsic" value.

Beyond that, currencies are (in a way) also backed to some extent by the value of the goods and services available to be purchased with them.

So cryptocurrencies can have value of the second type, but if they don't have baseline demand then there's little to stop everybody deciding to switch from one cryptocurrency to another at some point in time, leaving the first worthless - whereas baseline demand makes that extremely unlikely for a currency used in any major country's economy.

[nostrademons]

Governments are social constructions too. They can & do fail - we tend to forget about this in the developed world because our governments haven't failed within our lifetimes (though in much of Europe, only just barely, and in Eastern Europe / Russia / China that's not true at all), but it's a regular occurrence in other parts of the world. When a government fails its power to tax becomes void, and so (usually) does its currency.

The alternative - for someone wishing to transact in an alternative currency and not pay taxes - is to pay foreign or private powers for protection services and then simply not pay the tax. This is suicide in the U.S. because we have a large & well-organized military, but is commonplace in many other parts of the world - and indeed, the U.S. is frequently the foreign power supplying arms and accepting its currency for many of these rebel groups.

[jerguismi]

Taxation does create demand for government currencies, but it doesn't necessarily make it more usable in commerce. You could do all your transactions in other currencies, and only convert to the tax currency when you need to pay taxes.

[jhanschoo]

Considering the first order effect, you are right. But because governments tax only in their currency, they have a vested interest in making their currency valuable. This makes the US dollar more reliable than your friend's IOU for a favor.

[AstralStorm]

Presuming you can convert freely and you're not actually paid in it. Soviet states and foreign currencies, does anyone remember that?