Taleb on Bitcoin / Cryptos: a deconstruction

The 2007 book by Nassim Nicholas Taleb ‘Black Swan’ has been hailed by The Sunday Times as one of the twelve most influential books since World War II. However, his 6-page 2021 article titled “Bitcoin, currencies and fragility” deserves equal, if not more, attention.

Can a “currency” whose value rises and falls by 5% every few hours or 100 to 300% over a period of one year be considered, even from a distance, as a safe store of value? Arguably, as Taleb says, is this a Ponzi scheme at the end of it all? Cryptos are weak in their fundamental characteristics of CASH (Convertibility, Acceptability, Security, Homogeneity).

Taleb’s article applies quantitative financial methods and economic arguments to cryptos in general and bitcoin in particular. BTC is no longer truly a currency without a government, it is not a store of value, has no intrinsic value, is an unreliable weapon against inflation, and is not entirely a safe haven for investment or a means of security for catastrophic episodes.

Taleb beats cryptos but appreciates the technology behind it – blockchain – while questioning the practicality and use of blockchain to date. The blockchain enables the maintenance of a public ledger for P2P commerce, transactions and settlements – serial record keeping. Thus, online payments can be made from one party to another without going through a financial institution. The irony of the Bitcoin Transactional Currency (BTC) system is that it depends on the existence of miners in perpetuity. Additionally, by the very nature of the blockchain, BTC transactions are irreversible.

What is the value of BTC? Zero. Exactly zero. Precious metals like gold are maintenance free and their value does not degrade over time. This is different from cryptos which require maintenance (including, as mentioned before, their reliance on miners) and a sustained interest in them.

If we now expect the price to fluctuate at some point in the future, then according to the securities pricing literature (and trust Taleb on that – he was an options trader and an analyst of securities). risks) upstream induction must be applied and such variation must be incorporated into the price now. Wait a second, what does that mean? Simply put, this means that if the value of cryptos will be zero in the future when miners are turned off, technology becomes obsolete, or BTC loses its appeal as the next generation discovers other assets, then the value of cryptos must be zero now. On the contrary, gold and silver will be physically present for at least the next millennium and will also have some residual value. Cryptos’ “physical presence” is just a writing in a ledger that requires active maintenance from miners.

Additionally, cryptos can be slower than even African mobile money. Yes, you read that right. BTC is much slower than standard trading systems used by credit card companies. We can instantly buy a cup of coffee with our cellphones, but it would take ten minutes using crypto. Additionally, bitcoin transactions end up being more expensive than banking or other transfer methods.

Another problem with BTC is that each transaction is seen as isolated and discussed as such between two consenting adults. This is different from the circular flow of income in the economy: it is necessary to consider all the transactions and interactions between agents; contractual agreements happen between people; a specific transaction is just one part of the whole. There needs to be stability in value as the currency changes hands from one party to another. Cryptos have maintained extremely high volatility throughout their lifetimes (BTC itself between 60 and 100% annualized) and that too at higher prices, making their capitalization considerably more volatile and arbitrage opportunities exist. when exchanging hands. Cryptos are too volatile and they are doomed to fail in their current form.

Additionally, cryptos are associated with several errors. It makes good sense to assume that government structures and computing power are stronger than those of distributed operators in a perceived safe haven system, as distributed operators will never fully trust each other and may fall prey to hoaxes of ‘other operators.

Additionally, cryptos are prone to the error of the agency problem. To quote Taleb directly,

“One could get the impression that by being distributed, Bitcoin would be democratic and reduce the agency problem perceived as present among civil servants and bankers. Unfortunately, there appears to be a worse agency problem: a concentration of insiders accumulating what they believe to be the global currency, so others would have to turn to them later for stockings. They would cumulatively earn trillions, with many billionaire “Hodlers” – by comparison, the “bad officials” behind fiat money earn below-middle-class wages at best. This situation represents a transfer of wealth to the cartel of the first bitcoin accumulators. “

Taleb ends with a joke on Damascus. One seller was selling the exact same variety of cucumbers at two different prices because the one that was double the other’s price came with better quality mules. Much like Batman – that’s not what tech beneath – it’s not attributes. It’s what technology does – the problem it solves – that defines it.