Monthly Archives: July 2021

Let’s do some Taleb

Taleb recently published “Bitcoin, Currencies, and Fragility“, in which he makes a number of reasoning and understanding errors. Let’s dig in.

technologies that, ironically, all came out of the academic literature[3]

I have no fucking idea what’s supposed to be wrong with that.

Gold and other precious metals are largely maintenance free,

Gold requires storage and guarding, costs of which are very far from insignificant.

do not degrade over an historical horizon, and do not require maintenance to refresh their physical properties over time.

Wait, since when is that the case for Bitcoin? For all I care miners could stop mining for 500 years, after which they could very well start again, I’d still have my buttcoins safe and sound, and after a couple of weeks, difficulty adjustment kicking in would make the network as secure as it needs to be.

Not even mentioning that the less people mine Bitcoin, the more they get incentivized to get back at it. Moving on.

A central result (even principle) in the rational expectations and securities pricing literature is that, thanks to the law of iterated expectations, if we expect now that we will expect the price to vary at some point in the future, then by backward induction such a variation must be incorporated in the price now. […] Earnings-free assets with no residual value are problematic. The implication is that, owing to the absence of any explicit yield benefitting 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, or future generations get into other such “assets” and bitcoin loses its appeal for them, then the value must be zero now.

The reciprocal being quite obviously that given the current market price of Bitcoin no one seriously expects the “miners to extinct” (how would they?), “the technology becoming obsolete” (spoiler: Bitcoin’s value is not in its technology), or “future generations favouring some random shitcoin”.

Metals have ample industrial uses

The “Bitcoin has no fundamental value” meme has been done to death by now, come the fuck on.

We cannot expect a book entry on a ledger that requires active maintenance by interested and incentivized people to keep its physical presence

The bit Taleb seems to be missing in his understanding is that Bitcoin does not require “active maintenance”, as explained earlier. Miners could theoretically all shutdown and get back up a year later without my Bitcoins disappearing, or being stolen. And again, the existence of miners is a stable equilibrium, the less mining there is, the higher the incentive to fire up a miner.

While the path dependence concept is sound, its application to the existence of Bitcoin is based on dubious reasoning, faulty premises, and a complete disregard on mining incentives.

As discussed in[7], technologies tend to be supplanted by other technologies

Except Bitcoin really isn’t a “technology”. If its value were based on its technological superiority it would indeed be worth ~0. There’s much more sophisticated (technologically speaking) cryptocurrencies around, why haven’t they taken over Bitcoin despite being around for years?

Furthermore bitcoin is supposed to be hacker-proof and is based on total infallibility in the future, not just at present. It is crucial that bitcoin is based on perfect immortality; unlike conventional assets, the slightest mortality rate puts its value at 0

Bitcoin history shows that this is not true. He forgets the human element. Some very serious bugs were found, and fixed in coordination with the large miners. An example of this is the 2013 fork bug, where common incentives and interests allowed developers and miners to coordinate an emergency fix.

Bitcoin would be allowed to escape a valuation methodology had it proven to be a medium of exchange or satisfied the condition for a numeraire from which other goods could be priced. But currently it is not, as we will see next.

Let’s translate: “Bitcoin fits no valuation model I know of, so let’s normatively declare it to be worth zero”.

There is a mistaken conflation between success for a “digital currency”, which requires some stability and usability, and speculative price appreciation.

Conversely, there is a mistake conflation by Taleb between his own personal opinions and aspirations, and what is either interesting or relevant.

Transactions in bitcoin are considerably more expensive than wire services or other modes of transfers

Try transferring a couple million dollars, see how that compares.

while you can instantly buy a cup of coffee with your cell phone, you would need to wait ten minutes if you used bitcoin

At this point I’m starting to feel slightly stupid for expecting better from Taleb.

I’ll stop here, I don’t really feel like getting into the whole economic side of the discussion, the first part of the article already disqualifies Taleb on the whole matter, and whether one thinks commodity-based money is a good idea or not is largely irrelevant, Bitcoin is not going anywhere.