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Nassim Nicholas Taleb Shellacks Bitcoin and Cryptocurrencies

Summary:
Nassim Nicholas Taleb has weighed in on Bitcoin and its brethren in a new paper for New York University, Bitcoin, Currencies, and Bubbles, and finds nothing to like. We’ve embedded his analysis below and encourage you to read it in full. Taleb is far from the only expert in finance to pen a wide-ranging and overwhelmingly negative assessment of Bitcoin and other crypto (which for convenience we will refer to as Bitcoin). Nouriel Roubini published a no-holds barred takedown in the Financial Times in February. Roubini called out its lack of fundamental value, environmental toll, volatility, high transaction costs, and very slow processing. Taleb’s critique is even more fundamental. We joked early on that blockchain was a technology looking for an application. Taleb confirms that that is

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Nassim Nicholas Taleb has weighed in on Bitcoin and its brethren in a new paper for New York University, Bitcoin, Currencies, and Bubbles, and finds nothing to like. We’ve embedded his analysis below and encourage you to read it in full.

Taleb is far from the only expert in finance to pen a wide-ranging and overwhelmingly negative assessment of Bitcoin and other crypto (which for convenience we will refer to as Bitcoin). Nouriel Roubini published a no-holds barred takedown in the Financial Times in February. Roubini called out its lack of fundamental value, environmental toll, volatility, high transaction costs, and very slow processing.

Taleb’s critique is even more fundamental. We joked early on that blockchain was a technology looking for an application. Taleb confirms that that is still true. From Taleb’s conclusion:

We presented the attributes of the blockchain in general and bitcoin in particular. The customary standard argument is “bitcoin has its flaws but we are getting a great technology, we will do wonders with the blockchain”. No, there is no evidence that we are getting a great technology —unless “great technology” doesn’t mean “useful”. And we have done —at the time of writing —in spite of all the fanfare, still close to nothing with the blockchain.

Bitcoin fanboys may have tried to shrug off Roubini as a mere doom-oriented economist. They’ll have a much more difficult time dismissing Taleb. Taleb is a quant’s quant and has no patience with poseurs. He starts with a brief overview of the technologies that underpin Bitcoin and includes observations about Bitcoin that derive from currency risk hedging, but it’s not essential to parse them to get the drift of his gist. Even though he is not a computer scientist, he held senior positions in derivatives trading at top tier market participants, and particularly in the 1980s and 1990s, competitiveness in options and derivatives trading was very much dependent on fast IT development and implementation, so the senior traders would often work closely with the developers on the rollout of new trading models and tools. So his asides about IT are not to be dismissed either.

However, Taleb is also famous for suffering no fools, and so calls on readers to step up their game to follow his argument rather than making his arguments op-ed-level layperson friendly. However, the finance-literate will find this paper to be accessible as well as occasionally acid.

Taleb’s overarching compliant is that Bitcoin accomplished none of its supposed aims, including facilitating crime. Its volatility and speculative use makes it unworkable as a currency. One of the comments the paper highlights:

There is a conflation of “accepting bitcoin for payments” and pricing goods in bitcoin. For that the price in bitcoin must be fixed, with the conversion into fiat floating, rather than the reverse.

It isn’t a store of value, an inflation hedge or a safe haven either. It isn’t just that Bitcoin did poorly in the Covid panic of March 2000; it’s also not a techno answer to a bank account in a secrecy jurisdiction like Panama or the Isle of Man. From the article:

To many paranoid antigovernment individuals and others distrustful of institutions, bitcoin has been marketed as safe haven —also with the open invitation to fall for the fallacy that a volatile electronic token on a public setting is a place for your hidden treasure.

By its very nature, bitcoin is open for all to see. 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. For instance a Wolfram Research specialist was able to statistically detect and triangularize “anonymous” ransom payments made by Colonial Pipeline on May 8 in 2021 [18] —and it did not take long for the FBI to hack the account and restitute the funds.

Government structures and computational power will remain stronger than those of distributed operators who, while distrusting one another, can fall prey to simple hoaxes.

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.

Taleb makes much of the fact that the value of Bitcoin depends on having miners “in perpetuity”. He points out that other historical currencies, such as gold and silver, even if they had lost their luster and no longer function as inflation hedge or reliable stores of value, still have some fundamental worth due to their use in industry and jewelry. No such possible floor exists for Bitcoin. It similarly can’t be considered to be an asset because it can never generate income. Taleb puts aside collectables since they have what amounts to consumption value, as in enjoyment of their aesthetic qualities.

Let us go deeper into how a currency can come about. No transaction is analytically pairwise in an open economy. The root of the confusion lies in the prevalent naïve-libertarian illusion that a transaction between two consenting adults, when devoid of coercion, is effectively just a transaction between two consenting adults and can be isolated and discussed as such, pairwise. One must consider the ensemble of transactions and the interactions between agents: people happen to engage in contractual agreements with others; for them a given transaction is just a piece. To be able to regularly buy goods denominated in bitcoin (that is, fixed in bitcoin, floating in U.S.$ or some other fiat currency), one must have an income that is fixed in bitcoin. Such an income must come
from somewhere, say, an employer. For an employer to pay a salary fixed in bitcoin, she or he must be getting revenues fixed in bitcoin. Furthermore, for the vendor to offer a can of beer in fixed bitcoins, she or he must be paying for the raw material, and have the overhead fixed in bitcoin. The same with a mismatch of assets and obligations on a balance sheet. All this requires a parity bitcoin-USD of low enough volatility to be tolerable and for variations to remain inconsequential.

There are also arbitrage bounds present in any sufficiently efficient economy with relatively free markets.

Furthermore, if a vendor prices goods in bitcoin, and the value fluctuates from the initial fixing, the price will be directly or indirectly arbitraged: when the conversion rate to fiat is favorable, customers will buy from the bitcoiner; when unfavorable they will either buy elsewhere (indirect arbitrage), or if possible, return previous goods (direct arbitrage). For the price to not be arbitrageable requires the good to be unique and unavailable elsewhere at a fixed price in another currency –in this case it becomes, simply, a proxy to bitcoin. The only items that currently appear to be somewhat priced in bitcoin are other cryptocurrencies, even then.

Taleb does not invoke the MMT/chartalist view that the acceptance of a currency depends on the necessity of acquiring it to make tax payments. But he gets to similar place:

In 2021, the governments (central and local) share of GDP in Western economies is around 30-60%, one order of magnitude higher than it was in the 1900s. Government employees and contractors get paid in fiat; taxes are collected in fiat.

Taleb, as did Roubini, calls out the fiction that Bitcoin is somehow democratic:

One would have the illusion that, by being distributed, Bitcoin would be democratic and reduce the agency problem perceived to be present among civil servants and banks. 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 cumulativelyearning 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.

If you get as much of a charge as I do from getting ideologues wound up, I hope you’ll send this article on to your Bitcoin true believers and watch them go on tilt.

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