Nassim Taleb vs Bitcoin

Both cryptocurrencies in general, and Bitcoin in particular, have no shortage of critics, sometimes even outright haters. The crypto community has long come to terms with this. However, when people like Nassim Taleb criticize crypto, one really wants to understand their arguments.

Lebanese-born Nassim Taleb is one of the most remarkable personalities of our time. He’s an American writer, statistician, former trader and risk manager, Ph.D. His main scientific interest is studying the influence of random and unpredictable events on the world economy and exchange trading, as well as trading mechanisms in derivative financial instruments. To a broader audience, he is known as the author of the term “Black Swan”.

This summer, Nassim Taleb released his bitcoin “black paper” – the document titled “Bitcoin, Currencies, and Fragility” (https://arxiv.org/pdf/2106.14204.pdf). In it, he tried to explain why BTC is an improper asset and even a financial pyramid. We studied his arguments and looked at what we are ready to agree with and what we are not.

Taleb begins with the assertion that, despite all the hype, Bitcoin couldn’t really embody the concept of an “ungoverned currency”. Moreover, it is not even a currency; it fails as either a short-term or long-term store of value, cannot serve as a reliable hedge against inflation, and, worst of all, is far from a safe haven for investment.

The expert first examines the blockchain technology itself. He doesn’t criticize it but rather acknowledges that storing actions in a public ledger facilitates peer-to-peer trading, transactions and settlements, as well as serial accounting. The only thing Taleb doesn’t like about Bitcoin is that the hash rate growth leads to an exponential increase in the power requirements of computers. As a result, they end up consuming energy that could have potentially been used for other computational and scientific purposes.

From this, Nassim Taleb somehow deduces that BTC is worth exactly 0. According to him, gold and other precious metals essentially don’t require any maintenance, as they don’t decompose over time and can sustain their physical properties indefinitely. Cryptocurrencies, on the other hand, demand constant oversight. He would be right, of course, if crypto hadn’t from the very beginning been conceived of precisely as “money for the computer age”. In the same vein, it is absurd to compare cryptocurrencies to gold unless we would, for some reason, put ourselves in the living conditions of a thousand years ago…

Still, the expert goes on to describe hypothetical situations in which the BTC value drops down to zero: “When miners die out, the technology becomes obsolete, or future generations move to other assets after Bitcoin loses its attractiveness to them.” You might as well add “when the sun goes out” to the list, and it would have as little relevance to us existing and using cryptocurrency in the here and now.

From comparing bitcoin to gold, Nassim Taleb switches to contemplating a scenario where precious metals are no longer a medium of exchange. And while we all know about the abandonment of the gold standard, this does not mean that gold has lost its value. Taleb, however, builds some cumbersome philosophical constructions, trying to prove that the current price of BTC should be 0 for the simple reason that it may become that sometime in the future.

Nassim Taleb has his own interpretation of BTC miners’ role. He believes they “make their money on cryptocurrency inflation, not just the volume of transactions.” Therefore, according to the expert, Bitcoin’s inability to become a currency is masked by its price inflation bringing paper profits to a substantial number of people.

Then, Taleb follows up with a number of direct statements that are surprising, to say the least:

– Bitcoin transactions are significantly more expensive than banking services or other transfer methods.

– They are orders of magnitude slower than the standard commercial systems used by credit card companies.

– The BTC system cannot support a large volume of transactions.

Here we could only agree with the sluggishness of bitcoin transactions, and that’s only if we forget that the Lightning Network exists. However, the expert seems to be equivocating: Bitcoin does not really need lightning-fast payments that allow people “to pay for a cup of coffee.” There are many other cryptocurrencies with much faster blockchains fit for this purpose, as well as crypto-backed payment cards. But if you need to transfer a large amount of money from one country to another past banks and governments, then a 15-minute delay will not be a problem, and you definitely won’t find anything more convenient than BTC.

Nassim Taleb takes his time criticizing Bitcoin volatility: in his opinion, it cannot be tolerated by any reasonably efficient economy with relatively free markets. But then the “Black Swan” author stumbles and admits that cryptocurrency actually could replace fiat. “It would be great to have at least one truly ungoverned currency, – Taleb writes. – But the new money needs to be more attractive as a store of value by tracking a weighted basket of goods and minimal error services.”

When it comes to using crypto as a way to “get away from the state”, Nassim Taleb stands firm: “We can safely assume that government structures and computing powers will always be greater than those of distributed operators, who, not trusting each other, can easily fall prey to deception.” He also brings up the BTC blockchain transparency, making it vulnerable to any sufficiently in-depth analysis, as well as to the simple loss of Internet connection. (Hard to disagree with that one.)

Finally, the last of Taleb’s accusations against Bitcoin is that an oligopoly is increasingly taking control of it. In his opinion, a certain circle of insiders are accumulating BTC, hoping that it will become the world currency, and everyone else will have to turn to them for liquidity. Taleb sees it as “the transfer of wealth to the early bitcoin storage cartel.” To sum up, according to the expert, Bitcoin is the most unreliable zero-sum asset with an array of negative externalities.

We can only hope that history will refute this point of view on the first cryptocurrency.