Bitcoin rises from $14 to $40 in two months

Those who don't will live in their own little fork.

Finally, we examine a new contender - the mysterious and awesome Bitcoin.

I'll be frank with you, dear reader. When I came up with the MoMT, my first thought was: how can I, Mencius Moldbug, make some damned money from this? As system software is my first love, it was not that hard to think of an answer. In some ways Bitcoin is actually much better designed than my design, which was not distributed. The use of Lamport hash chaining is particularly elegant. I did not wind up building my design, however, because I sensed a problem. Bitcoin has the same problem, but worse.

But the basic economic design is the same: an artificial currency of limited supply. What is the currency backed by? Nothing but speculation and hot air. Note that this (contrary to its exponents' claims) violates Mises' classical "regression theorem." MoMT has no problem with an unbacked monetary candidate, because the required epsilon can be provided simply by the probability that the monetary system is adopted.

If Bitcoin becomes the new global monetary system, one bitcoin purchased today (for 90 cents, last time I checked) will make you a very wealthy individual. You are essentially buying Manhattan for a quarter. There are only 21 million bitcoins (including those not yet minted). (In my design, this was a far more elegant 2^64, with quantities in exponential notation. Just sayin'.) Mapped to $100 trillion of global money, to pull a random number out of the air, you become a millionaire. Wow!

So even if the probability of Bitcoin succeeding is epsilon, a million to one, it's still worthwhile for anyone to buy at least a few bitcoins now. The currency thus derives an initial value from this probability, and boots itself into existence from pure worthlessness - becoming a viable repository of savings. If a very strange, dangerous and unstable one.

I think the probability of Bitcoin succeeding is very low. I would not put it at a million to one, though, so I recommend that you go out and buy a few bitcoins if you have the technical chops. My financial advice is to not buy more than ten, which should be F-U money if Bitcoin wins. Or, of course, you can invest in those alpaca socks.

Here is the problem with Bitcoin: the tank, I think, will pop. This is not due to any technical fault in Bitcoin's algorithms or economics. It is due to a political fault in our society, which is that we're governed by dumb people.

Because we're governed by dumb people, here is what I think will happen with Bitcoin. Stage 1: Bitcoin does not exist. Stage 2: Bitcoin exists, but is worthless. Stage 3: Bitcoin exists, and is used by strange and desperate weirdos and geeks. Stage 4: Bitcoin is used by Slashdot readers, perhaps slightly less desperate. (You are here.) Stage 5: Bitcoin is used by criminals. Stage 6: All Bitcoin exchanges are shut down by USG. Stage 7: Bitcoin exists, but is worthless. Stage 8: Bitcoin does not exist.

At least on the surface, Bitcoin exchanges violate the critical know-your-customer rule which USG enforces on all money-transfer businesses. As a money-transfer business, you are essentially an agent of the government - a spy. To a regulator, Bitcoin seems like a way to transfer arbitrary quantities of money anonymously. This is a nonstarter, and the regulator knows exactly whose necks he has to squeeze - the spies who are not doing their jobs.

He cannot shut down Bitcoin itself. He can trivially shut down Bitcoin-dollar exchanges, or even Bitcoin-gold exchanges. Probably seizing all their dollars, etc. He probably can't seize their bitcoins, but it doesn't really matter.

To save in a currency is to place your trust in that currency. If you put energy into this great collective battery, you have to be able to get it back out. If that trust can be convincingly damaged, the currency has no chance. If people lose money in bitcoins, the currency can never recover. No one will ever again exchange it for dollars, or even alpaca socks. It will be dead. Its chances, now and forever, will be zero - not even epsilon.

If Bitcoin was centralized - sacrificing all real coolness - it could deal with this problem, perhaps, by applying KYC to all dollar transactions. But Bitcoin is not centralized, so there is no way the development team can prevent exchanges from operating. These exchanges are obvious targets for numerous predatory authorities. When they are destroyed, the currency dies.

What is Bitcoin's only chance? Perhaps that Bitcoin is not really anonymous. In fact, it is anything but. All transactions, though pseudonymous (named by a random key), are public and can be tracked by anyone, including said authorities. There is no financial secrecy in Bitcoin - it's a completely transparent system.

Which means that, if money launderers try to launder money through Bitcoin, they are actually doing the authorities a massive favor. It is very easy to track dirty bitcoins. If you know Pablo, a drug dealer, is using Bitcoin address X, you can download the entire graph of parties that X trades with, and roll up Pablo's whole network. Instead of shutting down the real-money exchanges, you can secretly force them to send you their entire customer database. That way, the terrorists, drug dealers, etc, are not hiding their transactions at all - they are sharing their most intimate details with the government. Heck, the DEA probably understands Pablo's finances better than Pablo's own people. That's what he gets for using Bitcoin.

But, as I said, we are governed by dumb people. Or, worse, committees of smart people. Therefore, I reiterate my target price on bitcoins: epsilon. Nonetheless, it probably wouldn't kill you to go buy five or ten - not that this is financial advice.

That's an overly simplistic view of the value of money. If the value of money were only based on belief, then one would except sudden collapses of monetary value without any connection to the real economy quite regularly. In a sense, money would be like the cartoon character who defies gravity until he looks down.

In reality, the value of money is based on people's demand for money. This demand is largely circular (the store wants money in exchange for goods because that's what the suppliers demand, and the suppliers demand money because that's what their employees demand, who demand it because that's what the stores want, and so on).

However, there are two decidedly non-circular sources of the demand for money. One of these sources is taxation: If the government decides that you have to pay your taxes in currency X, then there will always be demand for that currency. Even if your employer pays you in Bitcoin, you will still have to pay your income tax in whatever the local fiat currency happens to be.

The other source is debt payment: If you are in debt, you have to make certain payments (under threat of losing your house etc.).

These two belief-free sources of demand for fiat currency are the "base case of induction" for why fiat currency has value. They ensure that the viability of fiat currency does not depend on belief.