"The enlightened, disciplined mind is the holiest of holies, a wonder among wonders. Upon the Earth - a grain of sand in the Universe, man is on the order of one-billionth of the smallest magnitude... And yet this particle in your mind's eye, that lives but for sixty or so trips of the Earth around the Sun, possesses a mind capable of embracing the whole Universe... To comprehend this, we must switch to the language of higher mathematics... And so, what would you say if someone were to take from your laboratory a precious microscope and start pounding in nails with it?.. Garin has been treating his genius in just such a manner..."

— Aleksey Nikolayevich Tolstoy, "The Hyperboloid of Engineer Garin." (Translation and emphasis mine.)

"...like a refugee from very rural Pakistan who gets relocated to Oslo, Norway, and still thinks that he could make better food if he were only allowed to light a fire in his living room instead of using that complex electric stove. (This is a real news item.  Every now and then, landlords discover indoor fireplaces and occasionally the "newbies" to civilization burn down the building.)"
— Erik Naggum, comp.lang.lisp, 15 October 2002.

By now, nearly everyone has heard of Bitcoin. I will not bother with a detailed account of its mathematical, historical, or political foundations.  All of this has been written about at considerable length elsewhere.  But a short introduction is in order - if only because the word "bitcoin" has already started to give off a faint smell of spam and cocaine, and it is possible that respectable people who have never heard of Bitcoin will soon be met with less often than respectable people who have heard of it, but pride themselves on staying ignorant of its workings.  And being a long-time connoisseur of beautiful technologies which were trampled into the mud by stampeding herds of idiots, I could not resist the urge to say a few words on this subject.

The idea of a cryptocurrency has been around for a while.  All you need to create a cryptocurrency is for someone to declare that integers with certain properties are valuable, and put together a system which keeps track of who, at any given time, "owns" every known such integer; plus a means for the orderly transfer of said integers between owners. Bitcoin, like some past attempts at decentralized electronic "cash," satisfied these conditions through Byzantine fault tolerance - in essence, a networked consensus algorithm where all activity is public (albeit pseudonymous and authenticated through public-key cryptography.)

Now, the above would, in principle, be enough for a working electronic cash system.  There is still one obstacle: if someone were to proclaim that he is sitting on top of a stash of "valuable integers" and suggest that others should offer him goods or traditional money in exchange for some, everyone would laugh.  Firstly, because the natural question is, "why should we pay you for valuable Joe Smith Primes, when we could pay him for precious John Doe Primes? Or better yet, keep our dollars and buy some ice cream?"  And secondly, because everyone, even those foolish enough to purchase Joe Smith Primes for a penny each would naturally ask, "why should we purchase these particular Joe Smith Primes, if there is infinitely more where they came from?" [1]  Bitcoin satisfies these objections through the use of a Proof-of-Work System, where valuable integers can be searched for only by carrying out a computationally-expensive task, in conjunction with hash chaining, where the exact nature of the task at any given time depends on every past solution found, and on a faithful record of past transactions (cleverly dovetailing with the Byzantine consensus apparatus mentioned previously.) The latter process is referred to as "mining."  Thus, no one person starts with a vast supply of Bitcoins. And the properties of the "valuable integers" in question are well-understood, and from them it follows that there can never exist more than 21 million Bitcoins in total (each one, fortunately, can be subdivided, much like certain gold coins once were.)  And that "mining" will become exponentially more difficult as this limit is approached. Mathematically-inclined readers should refer to the original paper on the subject.  From this point on, we will ignore the mathematical details, save for assuming that the algorithm works "as described on the box" - something a great number of first-rate mathematical minds have verified to their satisfaction. Which does not, of course, rule out the possibility of a  yet-undiscovered cryptographic flaw - whether of the accidental or the intentional kind.

Bitcoin is quite different from all traditional currencies, as it is decentralized and non-inflationary, as summarized above.  The closest resemblance is perhaps to monetary gold - a rare metal, one easily tested for purity, and the supply of which increases very slowly. Of course, gold cannot be teleported, or concealed on a thumb drive, while Bitcoin can.  Thus the latter has become a popular subject among self-styled revolutionaries and protesters of all stripes, as well as the frugal, the fraudulent, and the merely avaricious.

Of course, any scheme that promises to become a more convenient means for the reliable storage of wealth than keeping bricks of precious metals around is also of some interest to ordinary people, especially in its early stages, when there may be some intrinsic reward for getting in "on the ground floor":

"One metaphor for monetization is that of a storage vessel, like a battery for electricity or a tank for compressed gas. When people buy into the currency, they are charging the battery and compressing the tank. When they sell out, they are discharging the battery. When new currency is created (perhaps by alchemists) without a buy-in, the tank has sprung a leak...  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!"

— Mencius Moldbug, "On monetary restandardization."

"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."
— Mencius Moldbug, "On monetary restandardization."

All modern governments stay in power by skimming from every "storage tank" (taxation), as well as by monitoring and keeping tight control of trade (in strategic commodities, arms, and just about everything else.)  So the above is more-or-less a no-brainer.

As economies around the world continue to tank, governments everywhere are certain to grow more unabashedly tyrannical and desperate to stay in control of trade and the storage of wealth.  Dmitri Orlov describes the fate of one foolish (physical) coin peddler who dared to market his wares as an "alternative" currency in competition with the U.S. Dollar:

"...precious metals have been and continue to be a spectacular investment, and a good way to avoid being robbed blind by the out-of-control printing presses at the US Treasury. But eventually it goes off into ontological self-delusion—that gold and silver are “real” money, as opposed to paper fiat currency, which is “fake” money. Ladies and gentlemen, it doesn't matter whether or not it's shiny; it's all as real or as fake as you are. Some people go straight over the edge and decide to take the law into their own hands and, waving about a dog-eared copy of the US Constitution, set off to coin their own “coin of the realm,” not realizing that the realm isn't theirs. If the realm is financially stable, it will simply change the rules to make such a gambit unprofitable. If the realm is financially distressed and teetering on the verge of collapse, it will panic, shout “Terrorism!” at the slightest provocation, and the result is long-term political imprisonment for the ontologically deluded:

March 21, 2011

WASHINGTON (Reuters) – A North Carolina man was convicted for creating and distributing a counterfeit currency that was very similar to the real dollar, a U.S. Attorney said.

Bernard von NotHaus, 67, minted Liberty Dollar coins in the value of $7 million dollars. The conviction concludes an investigation that was started in 2005.

“Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism,” Anne Tompkins, U.S. Attorney for the Western District of North Carolina, said in a statement on Friday.

“While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country,” she said.

This Reuters story has since been taken down, after being ignored by media in the US (but not in Russia). Von NotHaus is looking at 20 years in jail. This is a lot, you might think, for stamping some politically edgy shiny trinkets, but then Stalin gave out similarly long sentences to millions of people for doing absolutely nothing, so let us count our blessings. Let's get one thing straight, though: in the United States, by law, anyone who, “except as authorized by law, makes or utters or passes, or attempts to utter or pass, any coins of gold or silver or other metal, or alloys of metals, intended for use as current money, whether in the resemblance of coins of the United States or of foreign countries, or of original design . . .” faces a fine or imprisonment. It is the same in every other country: the term “coin of the realm” implies that it is the realm that controls creation of all coinage and its circulation. You can wave your US Constitution around, or you can swat flies with it, or you can use it as kindling: the result will be exactly the same. "
— Dmitri Orlov, "Financial Totalitarianism."

Nearly every serious student of the subject seems to believe that Bitcoin will be ruthlessly suppressed in the near future.  The only disputed details appear to be: what form the ban will take, and how it will be enforced.

Now, as Mr. Moldbug pointed out, if our rulers were truly clever, they might allow Bitcoin to live on indefinitely as a kind of honeypot. And if we are ruled by dull and desperate thugs, as Mr. Orlov believes, Bitcoin will be banned and woe be unto anyone who is found exchanging money or goods for a cleverly-chosen integer, or vice-versa.  There is certainly plenty of precedent for tyrannical bans on exchanging illegal bits - and certainly for arbitrary restrictions on the voluntary exchange of currency and goods.  It is entirely conceivable that incorrigible Bitcoiners will soon find themselves in front of firing squads, or at the very least, thrown into pits where they are to be tortured to death or driven mad by violent criminals.  No one save a few digital activist weirdos will notice or care.

But what if our rulers are clever, but not foolish enough to risk allowing anonymous, decentralized electronic cash to live on and grow in economic importance?  There is some evidence for just this scenario.  Said evidence also sheds light on the question of why the Bitcoin system was allowed to be popularized and grow to its current scale.  A clever tyrant would not remain content with merely filtering packets, or even shooting a few Bitcoin users in the public square to make an example. Instead, he would discredit the system in the eyes of its users - steering rebels, contrabandists, and digital misfits of every other kind back to old-fashioned, state-controlled money.

The real laugh is that there is no solid reason to believe that the world's national banks have seen it fit to sweat so much as one drop to vanquish Bitcoin through discreditation.  Bitcoin users themselves have been doing a thorough job of this.  Consider the case of GLBSE, (an abruptly-defunct) Bitcoin-based stock exchange:

"GLBSE user funds are more or less safe, but I have bad news from the GLBSE shareholder meeting.

Nefario has, without a shareholder motion and in violation of the bylaws and GLBSE ToS, decided to close down GLBSE. Users will be able to collect deposits only after submitting identity info. A similar system to the one that Goat was forced to use will be provided so that assets can be traded elsewhere.

He is also illegally using user deposits to pay for his lawyer. If he continues, the GLBSE cash reserves (which I manage) will not be enough to cover costs and GLBSE will be in debt to users.

I'm very sorry about this, but those shareholders who are sane are helpless against Nefario and the insane shareholders who for some mind-boggling reason think that closing down GLBSE in this way will help both themselves and GLBSE users.

Since Nefario refuses to give complete details about his legal concerns and he has been acting strangely, I feel that it is somewhat possible that Nefario is working under some sort of plea bargain and is gathering IDs for future prosecution.

Nefario has defrauded me and others in several different ways and deserves a scammer tag.
- The BitcoinGlobal bylaws state that BitcoinGlobal's purpose is to operate GLBSE. By shutting down GLBSE without amending the bylaws, Nefario has violated the bylaws.
- He has stated that he would ignore any motion to remove him as CEO.
- He is knowingly making BitcoinGlobal shares worthless, violating his fiduciary duty.
- He is refusing to release my GLBSE balance without my ID, which I did not agree to.

Since my GLBSE shares are now worthless, it should be obvious that I had no knowledge of this before now.

I urge everyone to never work with Nefario again. A Bitcoin stock exchange is a good idea, though. I hope that someone will create something better than GLBSE and MPEx."

6 October, 2012. Thread on bitcointalk.org.

Edit: And here is another idea for a more trustworthy yet equally-decentralized Bitcoin.

[1] Primality is mentioned here solely for the sake of argument, since we are discussing classes of "special integers," and primes (and certain varieties thereof) are one kind of "special" integer known even to schoolchildren.