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Gambling payouts aren't funding him, though... it's just gambling
Of course, but we should be allowed to gamble on this.
One way we could have funded him would be to start gambling on whether Brian Thompson is alive next year. If you want to insure against Thomson extorting you, then you bet that he will live. If you're Luigi, then you bet that Thomson will die... before improving your odds. That way there's no telling which participant in this "assassination market" is Luigi.
(I'm speaking hypothetically about a killing that took place in the past, not suggesting that we start betting on anyone's life. Because that would make us insurers.)
The payment system is irrelevant. The feds shut down the bets on the site, not the payments themselves. It's not like the feds can't track Bitcoin transactions if they want to anyways. Besides, the transaction fees for BTC are like $4 now. Do you want to pay a $4 fee on a $20 bet?
Well that just sounds like gambling²
You're gambling money to gamble money.
It's a lot harder to shut down dark web sites, like the Silk Road that ran for years. Both the website and the payments need to be difficult to shut down.
On dark web sites you generally deposit to an account, so you'd only pay the Bitcoin transaction fee for deposits and withdrawals. As of this writing that's under a dollar, for any number of bets.
If you want to use a bunch of different dark web sites, and/or want improved privacy, then you can use the Lightning network, which has onion routing like Tor and drastically lower fees. Or just use Monero; my point isn't really specific to Bitcoin.
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