Nassim Nicholas Taleb has changed his mind on Bitcoin. According to his latest analysis, Bitcoin is worth exactly $0.
We’ve read his article to see if we should change our mind too…
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Taleb on Bitcoin
Interesting turn of fate when Nassim Taleb, who wrote the forewords to the first edition of The Bitcoin Standard, now spends its time bashing BTC.
It is my understanding that this change of heart has more to do with a personal fallout between Nassim Taleb and Saifedean Ammous than anything else.
That’s probably why Taleb’s latest hit piece on Bitcoin is stretching arguments a little bit far.
This rebuttal of BTC comes in the form of an academic paper titled: “Bitcoin, Currencies and Bubbles”.
Spoiler alert, there is very little substance in this paper.
Now, I’ve only read the draft version posted on his website. The content of the final version might differ substantially. But most likely the heart of what he is saying will remain.
Anyway, there are three arguments presented in this paper:
Bitcoin’s value must be $0.
Bitcoin cannot be a currency.
Bitcoin is not a hedge against inflation.
Let’s start with the first argument.
Instead of quoting the article I’ll be rephrasing what is presented in there. Frankly, the author does its best to use convoluted sentences and technical jargon to state relatively simple things. So let’s bypass all that and go straight to what matters.
Taleb’s first argument can be summarized as follows:
Bitcoin is a digital asset.
To keep having value the network needs to be kept alive. Otherwise the digital asset will disappear.
But Bitcoin does not yield any dividend nor does it promise to do so in the future.
Without yield there is no incentive to keep the network running. Thus there is a non-zero chance that one day people will lose interest in maintaining the network.
When that happens Bitcoin’s value will drop to zero and stay there forever.
Since there is a non-zero chance that this happens in the future, then Bitcoin could become worthless and thus today’s value of Bitcoin must be $0.
Note that this reasoning is carefully crafted to encompass cryptocurrencies only.
Gold doesn’t yield anything but since it is a physical asset then it is fine for it to have some non-zero value forever.
Not all stocks yield dividends but people can hope that they will in the future and that’s enough to give them value forever apparently.
Same thing must be true for real estate as it is both physical in nature and can potentially generate yield in the form of rent.
Bonds (that might give you negative yields btw) are kind of excluded from the discussion for some reason...
Right, so it does not require very careful reading to see that this argument is pretty weak.
Let’s start with the end. Taleb applies a principle that says: if a non-yielding asset has a non-zero chance to be worth zero in the future then working in reverse it must be worth zero now.
Clearly that applies to gold… yet gold has had some value for thousands of years.
Now if you can’t apply that reasoning to gold then you can’t apply it to Bitcoin either.
Of course Nassim Taleb is smart. He knows that. So he needs to find a way to differentiate gold from Bitcoin.
Which is why he introduces the distinction between a physical asset like gold, which retains its physical property on its own, and a digital asset like Bitcoin, which requires a network to be functional.
Without a running network, Bitcoin the asset (as in the UTXOs on the blockchain that you have control over) is not functional and so its value can be worth zero.
But the bar to get there is pretty high. Indeed, Bitcoin is built as a permissionless decentralized network. You don’t need anyone’s approval to join. It has no single point of failure.
So as long as some people have an interest in running the network they can do so and Bitcoin remains functional.
For Bitcoin to be worth zero you would need to have exactly zero people interested in running the network. Yield or no yield that’s a big hurdle to clear if you want to kill BTC.
It is akin to saying that if gold was replaced everywhere in industry, if everybody discarded their gold jewellery and if gold was totally banned from the global financial system it would also be worth zero.
Is it possible? Yes. Is it very likely to happen? No.
Nobody knows what Bitcoin will be worth in the future. But using the previous logic to conclude that Bitcoin is worth exactly $0 is a stretch, unless you are ready to say that many more assets like gold must also be worth $0.
Some people think that’s the case but in practice this is not what we observe.
Moving on.
Taleb’s second argument is more straightforward:
You can use Bitcoin to purchase some products. But nothing is primarily priced in Bitcoin.
Thus Bitcoin is not a currency.
And since in recent history gold, silver and other precious metals have failed at being currencies, Bitcoin cannot become a currency either.
You can’t disagree about the first assertion. To my knowledge, at the moment there is no economy at scale where Bitcoin is used as a reference for pricing products and services.
Even in El Salvador, where Bitcoin is now legal tender, things are most likely priced in US$. Yes you can purchase using Bitcoin at whatever the going rate is. But things don’t originate with Bitcoin.
But you need to start somewhere!
First people price things in US$ and accept Bitcoin payments. Then some of them decide to keep the coins without converting back to US$ and make other purchases with them. When you have reached a certain scale of adoption things can start to shift being priced directly in Bitcoin.
I don’t expect this will happen fast though.
Indeed, due to the finite nature of Bitcoin, the larger the adoption the more value accrues to each coin. So it makes sense that the first step for Bitcoin is to be used as a store of value with speculative upside tied to adoption itself.
When we’ll reach a critical adoption level, there will be less growth, less volatility, less reasons to hoard Bitcoin and more reasons to spend it. This is where you can get a transition towards an actual currency in Taleb’s sense.
For sure there is no guarantee it will work. But the fact that we are not there yet doesn’t mean it can’t happen in the future.
Finally, Taleb’s last argument is even simpler:
Bitcoin’s value does not track an index of products affected by inflation.
Therefore it cannot be an inflation hedge over any arbitrary period of time.
To which I respond: well, duh.
According to this requirement the only acceptable inflation hedge would be to buy the CPI…
Obviously managing your stocks of toilet papers and gasoline isn’t very practical.
If you want to have an inflation hedge in perpetuity what you need is a diversified portfolio that is constantly readjusted to reflect the global economic situation.
Or… you can try to build a portfolio that generates large excess returns so that you are beating inflation and then some.
As we have seen in a previous edition of the newsletter, mainstream assets only provide a cyclical protection against inflation. But combining enough of them together should do the trick.
As you can see from the graph, even though Bitcoin has been around for a short time, its exponential growth has made it an inflation hedge (and some) in practice.
If adoption continues at a fast enough pace it is likely to continue doing so in the near future.
All in all you can see that Nassim Taleb’s arguments against Bitcoin are a little stretched:
If Bitcoin’s value is $0, it must also be the case for other stores of value like gold. That contradicts the observation.
Bitcoin in its current form is not a currency. But same as gold was not born as one it has the possibility of transforming into one.
Maybe Bitcoin is not an inflation hedge in theory. But in practice it is one.
So nothing new to see here. There is no reason to change your mind about Bitcoin.
That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.
Cheers,
Nick
Hi, Nick. I am living in Venezuela since many years ago and I can tell you with my own experience that thanks to BTC I have the peace of mind that my personal wealth is not thin air today. If it is not a hedge against inflation, nothing can be. Thanks for yours daily post I enjoy it very much.
Taleb… so he thinks personal rights are worth zero and pay no dividends either… History will not be kind on those that fight evolution…