How Bitcoin dies

TL;DR—Bitcoin dies in two very simple steps.

1: A DOJ indictment is unsealed which names everyone on Planet Three who operates, or has ever operated, or perhaps who has ever even breathed on, a BTC/USD exchange, as a criminal defendant.

The charge: money laundering. The evidence: the defendants knew that BTC were used for organized criminal activity. Therefore, they knew they were transferring money for criminals. This is quite simply the definition of “money laundering.”

(Obviously, prosecution under our modern “rule of law” proceeds according to these broad definitions, without regard to any specific technicalities. For instance, Aaron Swartz downloaded many more papers from JSTOR than JSTOR wanted him to. Therefore, he used JSTOR’s computers in a way that JSTOR didn’t want them to be used. Therefore, he could be prosecuted for “computer hacking.” Indeed he seemed to sense this when he put his bike helmet over his face and ran from the police. The details? They might have mattered, at the trial. But of course there was no trial.)

2: The BTC/USD price falls to 0 and remains there. BTC are permanently worthless. Everyone who was involved in the Bitcoin market and was holding BTC when the indictments were unsealed feels burned. Everyone who got out feels lucky. Many who escape prosecution, in fact, feel lucky. And BTC is remembered as an epic bubble.

This is a very strong prediction. Am I right? Am I this confident? I never get hate mail. Really—never. But won’t I get hate mail for this?

Obviously, I have no inside information at all and am just speculating—as a devout student of the fascinating organism that is USG. However, my guess is that this event will happen soon—i.e., probably in 2013. Why? Because of the ECB report on Bitcoin, which quoth:

All these issues raise serious concerns regarding the legal status and security of the system, as well as the finality and irrevocability of the transactions, in a system which is not subject to any kind of public oversight. In June 2011 two US senators, Charles Schumer and Joe Manchin, wrote to the Attorney General and to the Administrator of the Drug Enforcement Administration expressing their worries about Bitcoin and its use for illegal purposes. Mr Andresen was also asked to give a presentation to the CIA about this virtual currency scheme.

Further action from other authorities can reasonably be expected in the near future.

Neighbor, if you’re at all involved with BTC, I’d advise you to heed this remarkably direct warning. You’ll note that (a) the people who wrote this report do have inside information (since the ECB and our own dear “other authorities” operate, of course, in practice as a single global institution), and (b) these are people with actual power, and people with actual power tend to do what they say they’re going to do—regardless of how Reddit might feel about the matter.

Obviously, I am no fan of USG, DOJ, or JSTOR. My ideal outcome for the Aaron Swartz case would have involved Aaron getting away with it, and putting the JSTOR archive online. Indeed this would have been a remarkable and wonderful outcome. I can only hope the next person who tries the same thing comes has the same talents as Aaron Swartz, but brings his A game and comes armed for bear. But certainly, don’t take on the Man if you have any suspicion that the Man might take you instead.

And when it comes to USG, and USD—creating a successful distributed digital currency is what I call “coup-complete.” I.e., as a difficult problem, it is fundamentally equivalent to the well-known difficult problem of regime change. Are coups impossible? No, of course not. What’s impossible, however, is pulling a coup when you don’t know you’re even trying to pull a coup.

Government control (excuse me, “public oversight”) of all major monetary transactions is one of the basic attributes of sovereignty in the modern world. If you can get away with “money laundering,” i.e., circumventing this control, you can get away with anything. If you can systematically disable it, perhaps you yourself are the new regime. You’re certainly on the way.

Indeed, if we all traded in our dollars and dollar assets, and fully restandardized the global monetary system on BTC (technically a far superior design), it’s quite possible that Satoshi Nakamoto himself would simply emerge as our new global overlord. I suspect he’d be richer than the Rockefellers. How do you indict that?

My guess, solely from the broad public hint above, is that the collective bureaucratic decision to unleash the full right arm of USG on BTC was almost certainly made in 2012 or even 2011. An easy decision—since it makes a lot of work for all the deciding agencies. Meanwhile, the Bitcoin economy is buzzing merrily along, as if there was nothing wrong at all with Bitcoin. Technically and economically, there is nothing wrong. It’s a remarkably beautiful architecture—in fact, I would say, a genuine work of art in the field of system software. Its problems are entirely political.

Well, okay, that’s not entirely true. Bitcoin’s engineering is impeccable and its economic design is entirely sound. But most Bitcoin users—and, more important, supporters—seem to be laboring under a dangerous delusion as to the economic cause and effect behind Bitcoin’s success.

To me, and I hope to other UR readers, the logical leap from step 1 (BTC exchangers are indicted) to step 2 (BTC price goes to 0) is obvious. But here at UR, we are operating under our own special theory of money, which I have modestly dubbed MoMT (Moldbug Monetary Theory). If you know and believe MoMT, the leap is obvious. In the conventional wisdom, it’s not obvious at all. In fact, it’s unclear why BTC wouldn’t just preserve its value as is—without any gateway to USD.

Basically, MoMT tells us that money has anomalous value only because economic agents rationally speculate in it, whereas conventional thought (whether Austrian or orthodox) holds that money’s price is explained primarily by its use in trade. We are right, because we can explain ourselves clearly and they can’t.

Here is an example of the conventional wisdom (the author is a professional quant trader):

BTC is not an asset, it is a currency. Asset values do well when investors buy-and-hold for the long-term. Currencies die that way—they increase in value when they are traded, i.e., transacted in. A high ratio of buy-and-hold investors to merchant activity in a currency is a sign of speculative build-up. Paradoxically, the attractiveness of a currency to trade in is partially a function of how well it holds value—price level volatility bodes badly for that cause.


A currency’s value isn’t a function of how much of it is outstanding but how much is transacted in it. If “most bitcoins are held by… people” holding on speculation, they contribute to holding its value down (don’t think of stocks with dividends, think of fx).

I tremble for teh markets when I reflect that God is just. And not just the BTC markets.

My general sense is that most Bitcoin boosters think this way. If you hold BTC and you think this way, please let me take a moment to change your mind, so you can get out of East Gomorrah before DOJ turns you into a pillar of salt.

Of course, BTC is a distributed currency, so nothing USG can do can really stop the Internets from trading goods for BTC. Well, they can do one thing to stop the Internets from trading goods for BTC. They can make the price go to zero. Then, no one will care. But how do they do that?

Let’s engage in some very simple causal thinking about the price of BTC. BTC, like every other economic good, is an asset. BTC, like every other asset, does not have a “value”—nothing has a value. BTC, like every other asset, has a price—an exchange rate with USD. (It has prices in all currencies, but all reflect the same variable.) And, like all market prices, this exchange rate is set by supply and demand.

On any given day, smoothing out intraday volatility, the USD/BTC exchange rate is set such that the quantity of USD that BTC holders want to buy with BTC, and the quantity of BTC that USD holders want to buy with USD, is equal. Again the same is true for any price, i.e., exchange rate.

Let me try a different word than “holders”—“speculators.” It has a wonderful 20C retro ring. The connotations of “speculators” are so negative that I always want to say, “speculators and Jews.” Suffice it to say that there are many people who think they believe in free-market economics, but don’t. You can hear it when they use “speculators” to mean “holders”—or “privilege” to mean “property.” Mr. Orwell was definitely on to something.

What is the direct effect of a BTC-for-goods exchange on this price? Obviously, zero. The size of the BTC economy, or the velocity of BTC in that economy, or for that matter the size of the USD economy and its own velocity, have no direct impact on the USD/BTC exchange rate.

Speculation is conserved. Everyone who holds a currency, or an security denominated in said currency, is a “speculator.” First and foremost, they are speculating that the currency will not, relative to some other currency, decrease in its exchange price so as to make their investment a loser, relative to some other currency etc. If your bond portfolio returned 6% last year, but gold went up 9%, you have speculated incorrectly; if you could go back in time and speculate again, you would speculate instead in gold. (It’s hard out there for a Jew.)

Of course, as always in MoMT, all these speculators are solving a joint coordination problem with multiple Nash equilibria and need to find a Schelling point. There is always at least one overvalued commodity, asset or security, whose monetary premium usually explains most of its price. In BTC, the monetary premium explains the entire price. A better thought experiment could not be designed.

One could argue that BTC/goods trading volume has a psychological effect on the set of actors who do, or could, speculate in BTC. Sure. I didn’t say “no impact,” I said “no direct impact.” In a sense, monetary standardization is a situation in which, when enough people believe in fairies, the fairies become real. For the shrewd speculator, however, it is essential to always know the truth—even when participating vicariously, even profitably, in a collective lie. Sunspots would do as well.

But wait, you say. Surely, BTC-for-goods exchange has some direct impact on the BTC price, because people need to buy BTC—with USD—so they can buy their weed on Silk Road.

While this is true enough, the effect of this round-trip transaction on the BTC price is negligible, because it quickly reverses itself—unless your weed connection is also a BTC speculator. Let’s think about this for a minute.

Imagine that the BTC/USD market is perfectly liquid with no exchange overhead. Imagine also that there are two types of BTC users: Jews, who speculate (holding BTC long-term with the expectation that it will appreciate against USD); and Aryans, who only trade (and sweep all BTC balances into USD at the end of every day). These are simplifications, of course—but edifying ones.

You’ll see instantly that, since all overnight holders of BTC are Jews, if there are no Jews the overnight price of BTC in USD is 0. The Aryans have no one to sell to at the end of the day. Ergo, their BTC is worthless—and remains worthless in the morning. If no one wants to speculate in a currency, if the currency is held only temporarily by traders for frictional reasons, the velocity of money goes to infinity and the price to zero.  (Of course, friction ensures that once the price is zero, the velocity goes back to zero as well.)

So DOJ, to crush Bitcoin utterly, doesn’t need to do anything about the Aryans. It doesn’t need to be able to stop people from securely exchanging Bitcoin for goods. They will stop on their own, when the BTC price goes to 0—after DOJ crushes the Jews.

How does this work? Well, suppose you’re a Jew and hold 1000 worth of BTC. (In your own private wallet, of course—not on some fool’s server.) At 8:59 tomorrow morning, you have something. The price of a pretty decent Harley, in fact.

But at 9:00, the hypothetical indictments are unsealed (again, I have no inside knowledge at all). Google Now tells you right away. Your impulse? Your impulse is to go to your favorite BTC exchange and sell. All of a sudden, you’d really really really rather have that Harley.

But… your favorite exchange isn’t open. In fact, the domain name seems to have been seized. Same with the next three you try. Finally, you get down to #12 on your list. It’s 9:30. The URL is being frantically passed around. It’s in Russia.

Fine, it’s in Russia! Give me rubles! I don’t care! Anything! But alas. You cannot even get rubles for your BTC. Everyone wants to sell. No one wants to buy. A classic market panic, with no mitigating factors whatsoever. What could stop it? The price goes all the way down to zero.   And I don’t mean epsilon—I mean 0. At the very beginning, the BTC price was epsilon because almost no one believed in fairies. But some people did—because these people could, collectively, see the future. BTC did not have a present, but it had a future. Which turned out, for the lucky, to be a much larger number than epsilon. And these people—successful speculators—indeed made bank. The best of them will keep this bank, by selling high.

After the crackdown I expect (but, of course, hope won’t happen—these are, after all, government agencies, so hope really can spring eternal) there will be neither present nor future for BTC, just a past. Even today’s lame Bitcoin competitors (for obvious reasons, if you understand monetary standardization) have a market cap of epsilon. Why epsilon? Because they have a small fragment of a future. A possible future. The Bitcoin network could screw up its crypto somehow, or something. It won’t. But fine, maybe it’s worth a try.

Whereas after any such crackdown, it will be plain as day that Bitcoin and anything like it have no future at all. Those who speculated and stayed in speculated unwisely, because they chose a monetary standard that had all the qualities of a successful currency except one: resistance to government attack. You’ll note that our fine USG securities, while substandard on many indicators of monetary quality, have the world’s only perfect score in this department.

If I have one lesson to impart, here at UR, it is this: USG is what it is. It is not what you want it to be. It is not what you hope it will become. It is certainly not what it claims to be. No—it is what it is. Respect that reality, and you will neither run afoul of Leviathan, nor live “free” as his spiritual servant. In short: think for yourself and obey the strong.

(Also, you should note that gold, while by no means perfectly resistant to USG attack, is at least somewhat resistant to USG attack—especially since we don’t have anything like the badass USG of 1933. While Au scores very poorly on some monetary standardization metrics, such as investment return, it does very well on others, including some where USD really doesn’t sparkle. Especially with reserve-accumulating central banks participating more and more openly in the monetary-standardization game (i.e., “China buying on the dips”), the remonetization of gold can go much further than it already has, and strikes me as unlikely to reverse its course without some kind of major restructuring in the global economy, e.g., a disastrous outbreak of democracy in China.)