> How do you distinguish between currency and a medium of exchange?
A currency is stored, a medium of exchange is used right away (or traded for a currency).
> Is there a definitive reason why a less stable medium of exchange cannot be a substitute for a stable one?
Yes. Since it is unstable no one can rely on it. Since no one can rely on it people are unwilling to collect (and store) large quantities of it.
> To me, it seems that knowing (and potentially being able to predict) the variable forces that are affecting the volatility of a medium of exchange
If you can predict it, so can others. If I predict it will go up, everyone else will too. So everyone will hoard it - easy way to make money right? That means everyone wants to buy it, no one wants to sell - the price will skyrocket. Till it collapses, since it eventually will.
Then it collapses, people see the collapse, and everyone sells, the price goes to zero, and the process reverses.
A currency is stored, a medium of exchange is used right away (or traded for a currency).
> Is there a definitive reason why a less stable medium of exchange cannot be a substitute for a stable one?
Yes. Since it is unstable no one can rely on it. Since no one can rely on it people are unwilling to collect (and store) large quantities of it.
> To me, it seems that knowing (and potentially being able to predict) the variable forces that are affecting the volatility of a medium of exchange
If you can predict it, so can others. If I predict it will go up, everyone else will too. So everyone will hoard it - easy way to make money right? That means everyone wants to buy it, no one wants to sell - the price will skyrocket. Till it collapses, since it eventually will.
Then it collapses, people see the collapse, and everyone sells, the price goes to zero, and the process reverses.
To be a currency it must be stable.