I'm pretty sure I explained the value of use of bitcoins as a medium of exchange in footnote 2. The convenience and ability to facilitate transactions on the black/grey market might cause bitcoins to trade at a slight premium. On the other hand, volatility, concerns over hacking, exchange lag, and the threat of future government regulation may overshadow this and cause them to trade at a slight discount. I split the difference and assume that prices in the bitcoin economy adjust relative to the spot price, so that the real exchange rate is one-to-one. The problem isn't with the utility of a crypo currency in the abstract. It's that this will never come to fruition with built-in flaws like deflation, which inevitably lead to bubbles.