One of my favorite monetary thinkers, Jon Matonis, uses one of my favorite branches of mathematics, game theory (so you know – cooperation almost always trumps competition), to show why a government ban on bitcoin would backfire. Think of it like squeezing a balloon.  Squeezing it one on side, only results in the air expanding everywhere else. The same would happen to bitcoin, should the U.S. or other first world nation try to control or outlaw it. Any attempts to crack down on bitcoin will only results in other jurisdictions competing for bitcoin’s business.

From Forbes:

Aside from the impact on price, would a government ban on bitcoin, including a direct ban for law-abiding merchants, shrink the available size of the so-called bitcoin market? Is an officially “illegitimate” bitcoin a useless thing?

I maintain that a government ban on bitcoin would be about as effective as alcohol prohibition was in the 1920s. Government prohibition doesn’t even do a good job of keeping drugs out of prisons. The demand for an item, in this case digital cash with user-defined levels of privacy, does not simply evaporate in the face of a jurisdictional ban. One could even make the case that it becomes stronger because an official recognition that Bitcoin is not only a “renegade” currency but a “so-effective-it-had-to-be-banned” currency would imbue the cryptographic money with larger than life qualities.

Ironically, the ban would create something like the Streisand effect for Bitcoin generating an awareness for entire new demographic groups and new classes of society. Unlike alcohol, bitcoin itself might not be considered a consumption good but it certainly makes it easier to acquire and sell certain consumption goods.

The under-banked people of System D would awaken to using bitcoin for eliminating onerous fees or the risk of handling cash. The individuals seeking drugs without violence or prescriptions would understand the imperviousness of sites like the agorist Silk Road. The anti-banking crowd would race to get their hands on some bitcoin as a symbolic gesture to weaken bankers’ firm grip on payments. The pro-gambling casino people would all of a sudden realize how play money bitcoin bypasses the ridiculous and religious anti-gambling laws. The asset protection wealth managers would start to become fascinated with esoteric things like deterministic brainwallets and Tor.

Now with burgeoning covert and in-person exchange opportunities plus a variety of reliable exchanges operating outside of the U.S., the Bitcoin of our fictional story is far from fading into obscurity. Conversely, it is the ambitious opportunities for crony capitalism that fade into obscurity because a closed-loop bitcoin economy not requiring meatspace exchanges would emerge and accelerate.

One doesn’t drive Bitcoin underground. A free Bitcoin was designed to be ‘underground’ for its own survival otherwise it wouldn’t need such an inefficient, decentralized block chain. The low-cost and non-reversible bitcoin transactions that appeal to mainstream commerce are merely byproducts of a mutinous system that doesn’t rely on trusted third parties. Joel Bowman writing at The Daily Reckoning clearly recognizes that bitcoin’s future doesn’t depend on State legitimacy let alone low-cost sanctioned transactions:

In the end, bitcoin is a bet on the other side of The State’s coin; the free market side. It’s a bet that voluntary trade will, in the end, overcome neanderthalic force and coercion. It’s a wager that the conversation currently underway in the shadowy ‘black’ market is far more intriguing, far more complex, far more nuanced and exceedingly more interesting than the yip-yapping that distracts the undead, mainstream TV-consumer for an hour or so around feeding time every evening.

I would add that it’s also a bet on income and consumption privacy becoming the norm over ‘reportable earnings’ and invasive transaction tracking. It’s a bet that career mobility and independent contractor businesses will eventually outstrip the growth of the corporate wage-slave population. It’s a bet that the degree of an individual’s financial privacy is selected solely by the individual and not by what the State reluctantly permits.

Prohibiting bitcoin is the opposite of what a rational game theorist would conclude. But are our regulatory overlords smart enough to advocate a hands-off policy? If the State cannot plausibly ban bitcoin, why would they want to give it the additional power to grow and propagate? Bitcoin challenges the State as monetary sovereign and that has grave implications for their monetary authority and quasi-peaceful taxing authority. A savvy and smart regulator would seek to avoid the confrontation that “Old Bitcoin Radical” foresees.

Their best response to Bitcoin is irrelevancy, or failing that, extreme gold-like market manipulation for as long as possible. The end game for the State is perpetuating the fiat myth — their fiat myth not the populace’s cryptographic Bitcoin myth. They have always known that faith in money is a mass illusion, however they never considered that they wouldn’t be in charge of the illusion.

In the meantime, just enjoy the spectacle and relax people for mining bitcoin, holding bitcoin, sending bitcoin, and receiving bitcoin is not against the law inany country in the world.

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Do you ever watch a movie, and an otherwise smart character (or characters) does something monumentally stupid, or at least stupid enough to keep the plot going? Most of the time I overlook these momentary lapses of reason because it’s all just entertaining fun, but it’s hard not to notice when so much of the movie hangs on intelligence to begin with. The film Limitless, starring Bradley Cooper, is one of them. I love this movie by the way, one of my all time favorites. Cooper’s character, already enhanced with an IQ above 1000 from the drug NZT-48, makes the stupid mistake of borrowing money from a Russian mobster to margin his already 500%/day established day trading growth rate. He borrow’s $100,000. But he already has $7,000 and it’s growing at 500% per day. That means he’ll already have the same $100,000 in less than 36 hours anyway, so why the rush? The answer is the writer would have to use far smarter plot devices to match the characters 1000 IQ. If you’re going to write about a guy with a 1000 IQ you need to have a plot that does better at reflecting that.

There’s another movie, which shall go nameless, where two crews come to heads. Both crews are armed to the teeth, with their numbers about equal. One of  the crews is chasing down the bad guys for the government. The other crew is working  long and hard to score $100 million in a plutonium sale. Who has more loose, the Mercs-for-hire failing to capture the bad guy, or the bad guy loosing a $100 million deal of a lifetime? So the two crews have come to head in a valley, with the bad guys holding one of the good guys hostage. Remember, they are all equally armed. The good guys are all friends, the bad guys are just there doing a job for money. The bad guy tells the good crew to drop all of their weapons or he’s going to kill the hostage. Given this situation, what do you do?

In the movie, all the good guys drop their weapons, as they do in most movies. In this case it’s a bit surprising  since the Mercs have already been in a lot of  similar life and death situations and should understand the basics of game theory, at least intuitively. But that’s now how they act in this movie. The acquiesce to the bad guys demands.. The bad guys then kill the hostage anyway and walk away. The bad guys could have done worse and simply killed all the good guys, since they were all now disarmed.

Here’s what the good guys could have done:

The leader of the good guys could have asked all of his crew to immediately point all of their guns at the leader of the bad guys. Then say, “All of my guns are aimed at you. Go ahead, kill the hostage, then try and kill us, you might just succeed  But here’s the thing, regardless of how this plays out, and who wins in the end, YOU ARE GOING TO DIE. The choice is yours…. take your time.”   Obviously, the bad guy, unless he has lost all attachment to his life, will give the hostage up and walk away. And that would be the very best he could hope for. But since the whole movie depended on that atrocity, we wouldn’t have the movie, unless of course the writer studied game theory and came up with a smarter plot with smarter characters.

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