What is the reasoning behind the notion that because bitcoin has no intrinsic
value therefore it's not suitable as currency? Or, to put another way, if no one
"held" US dollars, but simply used them to spend or invest, would that
invalidate it as a currency for buying chickens?
The author addresses the difference between bitcoin and fiat currency (such as greenbacks):
Because of their power to tax, governments can make money by fiat, simply by
declaring their willingness to accept that money in repayment of tax debts.
I'll be honest and admit that I hadn't heard that argument before and off the cuff, it makes sense. Because the government can impose taxes and require they be paid in dollars, the demand for dollars will exist at least as long as the government has the power to tax.
I find this part of the argument to be pretty weak:
As with any kind of asset used as currency, from gold to tobacco to U.S.
dollars, Bitcoin is valuable as long as people are willing to accept it. But
in all of these examples, willingness to hold the asset depends on the fact
that it has value independent of that willingness. Tobacco can be smoked or
chewed, gold can be used to fill teeth or make jewellery...
The problem here is that the demand of gold for jewelry and other industrial purposes is minuscule and can't come anywhere close to justifying the price of gold (even in down markets.) If we believe this argument, the price of gold is going to go down so far that it might as well be zero.
The argument that I find convincing for why gold has been used as money for so long is that it's physical properties make it extremely suitable for that purpose. It's not consumable (e.g. you don't put it in your pipe and smoke it.) It is extremely stable: the list of fluids that will dissolve it is extremely short, it doesn't rust or sublimate. It is easy to smelt. It's heavy; making small amounts easy to measure. It's purity is relatively easy to determine.
It created a universal standard against which the value of other things could be measured so that people didn't have to determine how many chickens was a cow worth. Even if you were bartering, the relative value of the items could be determined based on their price in gold. As evidence of this it is said that the discovery of the touchstone sparked the explosion of trade in the ancient world. Nowadays very few people accept gold as payment so the demand for gold seems to be mostly fear-driven. People believe that if fiat currencies falter or fail, gold will return to it's position as the universal measuring stick of value. Only time will tell whether they are right.
Where does bitcoin fit into this? It seems to me part the demand for bitcoin comes from illegal activity. As long as hackers continue to demand ransoms in bitcoin, it's a bit like fiat currency. It's not a measure of value. It's value is measured in terms of fiat currencies like dollars. Bitcoin meets a need: a digital equivalent of cash. Technically it is traceable but it more or less fits that need. The biggest concern for bitcoin should be is that there's nothing inherent about it that makes it unique. Unlike gold, another competing system could be created at any time. There's been talk of a bitcoin 'fork'. If someone were to come up with a better system (say something that is impossible to trace) it might very well drop to zero.