What does Taleb think of Bitcoin?

“If there is the slightest chance that Bitcoin will be worthless in the future, it is already worthless today.”

Nassim Nicholas Taleb deals an all-around blow against Bitcoin in a paper: The cryptocurrency is no good as a currency or protection against inflation; its real value is exactly zero come zero. We read the paper with horror.

Nassim Nicholas Taleb has written a paper about Bitcoin. If you know the famous author, I don’t need to introduce him; if you don’t know him, you don’t need to read anything about where he stands on Bitcoin.

When ego outgrows, intellect

Therefore, in a nutshell: Taleb actually comes from a trading background but has built a brand for himself as someone who combines probability, risk management, and ancient wisdom into a real-life philosophy. His books, such as “The Black Swan” and “Antifragility,” are among the most interesting that popular philosophy has produced in recent decades.

However, by “Skin in the Game,” at the latest, it was apparent that Taleb’s ego has run away from his intellect. The arguments become thinner and more muddled, and he drowns the increasingly annoyed reader with egomaniacal statements, boastful anecdotes, and crude, slobbering bashing of academics, journalists, and politicians.

How Taleb became a bitcoin foe

As recently as 2018, Taleb wrote the foreword to the book “Bitcoin Standard.” But something happened, and he started railing against Bitcoin on Twitter this spring. In the process, he usually writes something about “idiots” and “amoeba brains.”

Then he was invited to the Coingeek conference in Zurich, where he discussed via video with Craig Wright, and after that, he published a paper “proving” that Bitcoin has a value of exactly 0 dollars.

And so here we are. In his paper “Bitcoin, Currencies, and Bubbles.” Fortunately, the paper has only six pages; it mixes in those, unfortunately, a whole lot of theses.

How not to explain blockchains

First, though, Talebt describes what a blockchain is. Surprisingly, it then sounds like this:

“The concept behind such a chain is quite intuitive to early practitioners of quantitative finance. Keep in mind that before efficient software for Monte Carlo simulations became widely available, some of us used methods to build pseudorandom variables through some forms of chained nonlinear variables, much in the spirit of Von Neumann’s original idea.” I see. Then follows a series of formulas until one learns what the blockchain adds to it all: “the condition that functional and probabilistic must be bijective.”

Like this, so. And what does that tell us? All I can think of is that Taleb is using it to prove that his usually finicky bullshit generator stops working when he hits the keys himself.

However, let’s let this awkward intro be an awkward intro and get to the heart of the matter:

“Why Bitcoin is worth exactly 0.”

Taleb now presents what at first glance appears to be an interesting argument as to why Bitcoin’s value must be zero.

He begins somewhat convolutedly with the “law of iterative expectations.” This makes it the “central principle of rational expectations about the price of securities” that this incorporates the expectation in the present that we will one day expect the price to change.

This is not uninteresting: the current price incorporates the expectation of future prices and the expectation of the expectation.

Also not uninteresting is a kind of classification of Bitcoin as a financial instrument: many stocks pay dividends, and those that don’t can be expected to be bought out later as the company grows. So stocks generate income. Bitcoin and gold have in common that they do not generate income.

Unlike Bitcoin, however, there is a “real” demand for gold, on the one hand from jewelry manufacturers, on the other hand from industry, he said. And unlike Bitcoin, gold works even when miners are not actively maintaining the blockchain, he said.

So Bitcoin is an extraordinary asset: it doesn’t yield any returns, and it can lose all value if miners stop being miners. Taleb now states a law that fits Bitcoin like a glove: If an asset does not yield a dividend and there is even the slightest chance that it will hit an “absorbing barrier” one day, its current value must be zero.

Since Bitcoin does not pay dividends and there is a risk that the system will fail if miners turn their backs on it — Bitcoin’s current value must be zero.

The Scientific Value of Taleb’s Thesis

So Taleb claims that the value of Bitcoin is zero, and he thinks he has proven it.

The argument is difficult to refute because it is not, in essence, an argument. It’s not even a hypothesis since Taleb does not attempt to explain it logically. It is nothing more than an assertion plucked out of thin air: an asset that earns no dividends but can fall to a value of 0 in the future must also have a value of 0 now.

Neither Taleb presents logical or empirical reasons why his assertion should hold, nor does he take the trouble to test his “thesis” against reality. He puts it in the room and then thinks that this would be sufficient for it to be true.

But the thesis is already logically seen completely untenable. If it were an algorithm, the computer would crash; if it were a poem, it would miss the beat. Taleb claims that goods like Bitcoin can have no value in the present because they could lose it in the future. But since every point in time was once “present,” the goods should never have had any value. But this is empirically wrong — Bitcoin had and has a value — and it is logically meaningless: Only what once had a value can lose it. So Taleb’s thesis contradicts itself.

One could perhaps eliminate these contradictions. For instance, by deprecating the point in time: The asset in question will be worthless before it becomes worthless; present means not every present, but any present, necessarily a present in the future, so accordingly: future. However, the theory thus escapes any empirical testability: the present in which Bitcoin becomes worthless can, after all, still occur, no matter how far we are in the future. This cannot make Taleb’s thesis untrue.

Alternatively, one could define “value” differently: It is not the price something fetches in the market that is the “true value” but what a sophisticated theory asserts. For example, the theory that Taleb expounds in the paper. With that, of course, the theory would always be right about the value of Bitcoin since the value is what it says it is. If Taleb says the value of Bitcoin is zero, then he is right since the value of Bitcoin is what he says it is. This would also remove the thesis from testability.

Science, however, means developing internally consistent theses whose truth can be tested in a comprehensible way. Taleb’s thesis, however, is either self-contradictory or untestable. Its scientific value is, therefore, in the future and the present … zero.

I think, so it must be

As already mentioned, Taleb does not take the trouble in his paper to check, confirm, refute or substantiate the thesis he throws into the room. Instead of doing science, he follows the motto: Cogito, ergo est: I think, therefore it is so.

He could use the remaining four pages of the paper to put his thesis on a solid foundation. But instead, he throws a battery of similarly weak criticisms of Bitcoin at the reader.

First, he says, it is a “fundamental flaw” of cryptocurrencies that the miners who maintain the system make money by creating new units rather than earning from the payments volume. Inflation, he said, “obscures Bitcoin’s utter failure to become a currency.”

Second, and somehow related to first, he grouses, Bitcoin transactions are more expensive than bank transfers and “orders of magnitude slower than competing commercial systems.” To buy a coffee with Bitcoin, Taleb knows, you have to wait ten minutes. The whole system, he says, is not even capable of processing a large volume of transactions.

At this point, one can only shrug one’s shoulders in pity. Taleb demonstrates his ignorance so clearly here that the whole embarrassing presumption underlying his paper is revealed: He has no idea but still knows better than everyone else. Cogito, ergo est.

Anyone who knows even a little bit about cryptocurrencies, who watches Bitcoin and Ethereum transaction fees, who has ever used unconfirmed transactions, who watches Lightning development — anyone who even sporadically studies crypto would know better than Taleb.

But unfortunately, the paper goes further.

Because value is not inflationary, one thing cannot be an inflation hedge

Taleb now pivots to the demonetization of gold. As is well known, with the end of the Bretton Woods system in 1971, the convertibility of the dollar to gold was dissolved, which meant that the dollar was no longer (directly) backed by gold.

Before that, there was a gold and silver bubble. After that, gold and silver lost a lot of value. “Even today, 41 years later,” Taleb now claims, “neither gold nor silver have reached their previous peak.” Of course, this is only true if you factor out inflation.

This interesting fun fact now means Taleb concludes for rather mysterious, once again unrevealed reasons, that gold is not a good inflation hedge. Wait … again: we have a commodity whose price resists inflation so well that Taleb has to factor it out to see that the value is stagnant — and then he claims it’s not a good inflation hedge? Really? How does one come up with that?

Somewhat more solid is his argument that it is not enough for a currency to have two economic agents transacting in a given unit. Instead, wages must also be paid at the currency, and prices must be denominated in it. Thus, for Bitcoin to be a currency, it would need wages in a fixed Bitcoin amount. This is not the case at present and cannot be the case in the future.

Why it could not be in the future, Taleb keeps to himself. But in itself, this would be a (familiar, well-known) argument against Bitcoin that can be left standing. The paper has reached its intellectual peak.

He who tricks once …

After that, Taleb rattles off a chain of further alleged points of criticism, which I don’t want to bother to reproduce. They are partly confused and incomprehensible, partly without substance, partly fundamentally wrong, partly nutritionally sound.

For all that, it’s not that I’ve been a fan of Taleb’s so far. I was extremely annoyed reading Skin in the Game after no more than halfway through. But still, I had a certain respect for his intellect. I found his theses inspiring, original and challenging, and I even admired the power of language and vehemence with which he hammers them into the reader’s head. But this paper here raises a different question:

If an author demonstrates the ability to pass off nonsense as science, and therefore there is some chance that his theories will fall into an absorbing barrier in the future — does everything he writes and says have a value of exactly 0?

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