Nassim Nicholas Taleb recently published his latest draft of Bitcoin, Currencies, and Bubbles:
Bitcoin, Currencies, and Bubbles
This discussion applies quantitative finance methods and economic arguments to cryptocurrencies in general and bitcoin…
This article is not intended to be a complete counter-thesis, nor do I believe that all of Taleb’s arguments are incorrect. But I do aim to refute or counter a number of Taleb’s points which I consider to be flawed.
On Bitcoin extinction
The implication is that, owing to the absence of any explicit yield benefiting the holder of bitcoin, if we expect that, at any point in the future, the value will be zero when miners are extinct, the technology becomes obsolete, future generations get into other such “assets” and bitcoin loses its appeal to them, then the value must be zero now.
Taleb provides a few potential causes of Bitcoin’s eventual extinction. We’ll explore them in turn.
On miner extinction
“When miners are extinct” muddles the cause and effect of Bitcoin mining, essentially putting the cart before the horse.
For Bitcoin mining to go extinct, the actual cause must be for transactions to tail off. So long as there are transactions and fees, there will be miners; a certainty which is guaranteed by Bitcoin’s block rules and difficulty adjustment mechanism. While there are transaction fees to be collected, the hashing difficulty will tend towards a value which incentivizes collecting those fees, thus guaranteeing mining will take place.
Will Bitcoin’s transactions ever tail off? Only if the network stalls in gaining adoption. This is a given; nobody argues that Bitcoin will be a success with or without adoption.
On technological obsolescence
Taleb expands on this point later in the piece:
Technologies tend to be supplanted by other technologies with a vulnerability in proportion to their past survival duration (>99% of the new is replaced by something newer), whereas items such as gold and silver have proved resistant to extinction.
This argument is tantamount to saying “there can never be a replacement for gold” because nothing can break that 6,000 year historical record. In which case, perhaps we should stop trying?
Taleb implicitly excludes gold from being classified as a “technology” and so assumes it can not be replaced. But gold is absolutely a monetary technology in the same way the plough is an agricultural technology. Just because gold does not exist as a combination of code and binary data flowing through the internet, does not make it immune from replacement when a superior monetary technology comes along.
Perhaps its replacement could be a technology that (unlike gold) requires virtually zero cost to custody, and virtually zero cost to transfer across the world in virtually zero time?
Taleb also ignores that successful technologies usually build upon other technologies. The internet, which Bitcoin is built atop, is the culmination of a century or more of computer science. And said computer science is built atop centuries more of prior science and innovation.
So let’s assume there is a successor to Bitcoin a century from today. It would not surprise me if that successor continues to use Bitcoin and its existing store of value as a base layer.
On future generations
Yes, it is a possibility that “future generations get into other such ‘assets’”. Bitcoiners do not pretend that gaining adoption and keeping that adoption is not crucial to Bitcoin’s success.
I’m not clear on what the end result of this argument is, though. Should Apple have skipped on building the iPhone because future generations may get into Android? No — they believed in their product, they built it, they marketed it, and they made it a success. Bitcoin aims to do the same.
On path dependence
Path dependence is a problem. We cannot expect a book entry on a ledger that requires active maintenance by interested and incentivized people to keep its physical presence, a condition for monetary value, for any such period of time — and of course we are not sure of the interests, mindsets, and preferences of future generations. And once bitcoin drops below its level, it hits an absorbing barrier and stays at 0 — on the other hand gold is not path dependent.
“Gold is not path dependent” is another statement presented without evidence.
Gold is entirely path-dependent. It is by no means the rarest or most stable substance on Earth, and as such it has no intrinsic right to its store-of-value status. And yet through accidents of history, along with a magpie-esque tendency for humans to gravitate towards shiny metals, it has indeed accrued that status.
Bitcoin’s value is of course also path-dependent. How could it be any other way? There is nothing on Earth of any value, whose value was not built in some path-dependent way. So this seems like a moot argument.
It is also a reasoning error to claim that an innovation, bitcoin, can become the “new gold” ab ovo, when gold wasn’t decided to be so by fiat thanks to a white paper; it organically became the reserve ex post, throughout centuries of competitive selection against other modes of storage, payment, and collectibles.
Nobody believes that the Bitcoin white paper decrees “by fiat” that Bitcoin has value, and nobody rests on the authority of the white-paper as a declaration of Bitcoin’s true value. So this argument seems facetious.
Satoshi’s white-paper provides a blueprint for a store of value only. It gives no marching orders for the world to adopt it, or associate value with it. The world is capable of recognizing that value under its own steam.
Gold elicited an aesthetic fascination and had been used as jewelry and store of value from such demand for more than two millennia before it became, literally, a currency or before there was such a thing as a currency
There’s that path-dependence I mentioned earlier. Taleb may believe aesthetic value is enough of a historical bedrock for a true store of value. I question whether we can’t do better this time and remove such arbitrary human factors from the equation.
Unfortunately, there appears to be a worse agency problem: a collection of insiders holding on to what they think will be the world currency, so others would have to go to them later on for supply. They would be cumulatively earning trillions, with many billionaire “Hodlers”; compare with civil servants making lower middle class wages. It is a wealth transfer to the cartel of early bitcoin adopters.
Throughout history kings, dictators, governments and empires have sacked and hoarded the wealth (and the gold) of their constituent countries. We live in a world of ‘old money’ gathered through violence, war, and territorialism.
Bitcoin allows anyone to accumulate it, at any time, at a cost of either energy or other forms of currency. If it achieves its ultimate goal, it can still be considered to be in the ‘early adoption’ phase at which anybody may accumulate it for a reasonable price.
Which system seems to have more of a fair system of distribution?
More generally, the fundamental flaw and contradiction at the base of most cryptocurrencies is that, as we saw, the originators, miners, and maintainers of the system currently make their money from the inflation of their currencies rather than just from the volume of underlying transactions in them. Hence the total failure of bitcoin in becoming a currency has been masked by the inflation of the currency value, generating (paper) profits for large enough a number of people to enter the discourse well ahead of its utility.
Let us assume for one moment that there could be some new hypothetical store-of-value asset that Taleb believes could emerge and actually be successful.
Assume that such an asset could be created. There would be an unavoidable period of time during which the asset would go from a market cap of zero, to a cap of many trillions of dollars. Obviously that process could never happen instantly with any credibility.
During that period speculators would see the asset as essentially a call-option on its future value. They may be correct, they may not.
So this argument essentially boils down to “you can not replace gold or other store-of-value assets”. Because if it is possible to replace them, of course speculators will jump on early to make money during the early appreciation phase of said replacement asset. That comes as no surprise.
Transactions in bitcoin are considerably more expensive than wire transfers or other modes, or ones in other cryptocurrencies, and order of magnitudes slower than standard commercial systems used by credit card companies — anecdotally, while you can instantly buy a cup of coffee with your cell phone, you would need to wait ten minutes if you used bitcoin
There appear to be other protocols issued from the original white paper that claim to be more transaction focused; as with Ethereum, we exclude them from this analysis.
This argument completely ignores the lightning network, which sits atop Bitcoin as a transactional layer, and is both instantaneous and virtually feeless. Bitcoin is designed to act as the store-of-value and settlement layer beneath.
As such, we can completely ignore this argument. It is not enough for Taleb to say “we exclude [other protocols] from this analysis”, when the existence of lightning directly contradicts his analysis.
To date, twelve years into its life, in spite of the fanfare, with the possible exception of the price tag of Salvadoran permanent residence (3 bitcoins), there are currently no prices fixed in bitcoin, floating in fiat currencies in the economy.
Again, it would be spurious to expect prices to be fixed in Bitcoin units a mere ten years into its life.
Bitcoin at this stage is focused on adoption. Being a unit of account can emerge naturally after Bitcoin has been widely adopted. The opposite is not true — unless you declare by fiat that Bitcoin will be the unit of account, with adoption coming later. Bitcoiners naturally want to avoid this; adoption must be voluntary above all else.
For what it’s worth — we typically don’t price things in grams of gold either. People seldom use that as an argument as to why gold should not have value.
Now bitcoin, as seen in Fig. 1 maintained extremely high volatility throughout its life (between 60% and 100% annualized) and, what is worse, at higher prices, which makes its capitalization considerably more volatile, rising in price as shown in Fig. 2 –is it too volatile to fail?
Again: bear in mind we’re discussing an asset which is rapidly capitalizing.
Assume any asset that could replace gold or other stores-of-value over a decades long period. Is there any legitimate process for that to happen without huge volatility on the way up? Or are we seeing Taleb hunt for a black swan?
The belief in one’s ability to hide one’s assets from the government with a public blockchain easily triangularizable at endpoints and not just read by the FBI but by people in their living room also requires a certain lack of financial seasoning and statistical understanding — perhaps even simple common sense.
The existence of privacy or anonymity on the Bitcoin network (beyond pseudonymity) is not a belief held by any serious proponent of Bitcoin.
Of course many Bitcoiners believe that privacy is important, and privacy options may emerge in future as Bitcoin evolves— but at present, it seems like Taleb is setting up a straw man to blow over.
In the cyber world, connections are with people one has never met in real life; infiltration by government agents are extremely easy. By comparison, the mafia required a Sicilian lineage for “friends of ours” so they could do their own security clearance type of check. One never knows the degree of governmental surveillance and real capabilities
The thesis of Bitcoin is precisely that you do not need to trust any third party to store and transfer value. Bitcoin guarantees only that you own the coins you own, and that your coins will be sent to the address to which you intend to send those coins, and to nobody else.
Bitcoin does not guarantee the identity of that sender or payee, or guarantee whether that party will keep their end of any deal. It does not guarantee anything other than the above statements, nor does it rely on you to trust anyone for those guarantees to be met. That is the basis of trustlessness.
So we close with a Damascus joke. One vendor was selling the exact same variety of cucumbers at two different prices. “Why is this one twice the price?”, the merchant was asked. “They came on higher quality mules” was the answer
One online vendor was selling the exact same variety of cucumbers at different prices. “Why is this one twice the price?”, the merchant was asked.
“If you pay with gold, I must wait a week for settlement. If you pay with fiat, I must pay huge transaction fees to my card processor. If you pay with lightning, I will pass the savings on to you” was the answer.