The author, an economist to top it all, completely glosses over fiat currencies (eg. currencies no longer convertible to gold.) "Fiat" literally means "currency without intrinsic value", ie. "arbitrary value."
Sorry to burst your bubble, but the intrinsic value of a currency is not based solely on naturally occurring scarcity, but on a marketplace's faith in its stability as a means of transaction.
Gold was, once upon a time, THE standard, this is true. But the problem with gold is that its supply bears no relation to the needs of the economy. The supply of gold depends on what can be mined.
In the 16th Century, the discovery of South America and its vast gold deposits led to an enormous fall in the value of gold - and therefore an enormous increase in the price of everything else.
Since then, the problem has typically been the opposite - the supply of gold has been too rigid. For example, many countries escaped the Great Depression in the 1930s by unhitching their currencies from the Gold Standard. Doing so freed them up to print more money and reflate their economies.
The demand for gold can vary wildly - and with a fixed supply, that can lead to equally wild swings in its price.
Most recently for example, the price has gone from $260 per troy ounce in 2001, to peak at $1,921.15 in September 2011, before falling back to $1,230 currently.
This is hardly the behaviour of a stable store of value.
Physics-envyists engage in scientism, having the superficial appearance of science by way of high-minded terms liquidity, velocity, circular flow, price level, and quantity needing to grow with the economy, but it is utterly hollow. If supply is not rooted in genuine demand, pouring on more and more money (“reflating”) will not fix the root problem.
Consider that if currency inflation (printing more money) produced an instant uniform increase in all prices, then the effects on purchasing power and prices would cancel each other out — leading to no net effect. The market does adjust to changes in the supply of money as you noted, but these changes take time and cause prices in some sectors to rise more than others. Here again the easily swayed layperson might make these observations and wonder why bother about it.
Whereas fiat currencies the supply bears only a relation to the needs of the government's spending.
On occasion, of course, this is the same as "the needs of the economy". But that happens too with the gold supply.
Thing is, fiat currencies keep their value, on average, for something like 70 years (discounting inflation, I mean the average time it takes from money getting issued to when it is no longer accepted anywhere, like happened to quite a few currencies in WWII). Gold, even in modern times, has outperformed them on that (though, yes, it certainly does not have 7000 years of acceptance like some claim, but it easily gets into centuries)
The fact of the matter is that intrinsic value is not a real thing, and as a model it makes bad predictions for assets primarily intended as mediums for exchange and value storing.
A bitcoin has value because bitcoins are in demand. Same thing.
Economically speaking it doesn't matter why people demand them (eg. to pay a merchant or to pay taxes). The demand in and of itself is what gives them value. I would then argue that technically Bitcoin is fiat currency.