One of the tenets of Austrian Economics is that there is a sharp methodological distinction between social sciences and natural sciences as explained by Ludwig von Mises in his 1942 essay on this subject. Not so with Nicholas Nassim Taleb’s intellectual excursions. Reading his essays one feels just short of “being intellectually raped” by a barrage of strange mathematical formulas, blasé intellectual vocabulary followed by some anecdote about the mob. A blatant example of this is Taleb’s just out academic paper Bitcoin, Currency and Bubbles. Here he tries to prove that Bitcoin cannot be money, must have zero value now and cannot be a safe haven for wealth.
Let’s start with the obvious: it is utterly crazy to attempt to prove that the value of Bitcoin must be zero now! Somewhere in the middle of his 6 page paper he literally writes:
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 made a lot of fanfare about him selling all his Bitcoin at the top of the latest all time high. Good for him. But has the price of Bitcoin dropped to zero as he not only predicts, but commands? Taleb seems to be throwing a tamper tantrum that Bitcoin didn’t drop to zero, since this would greatly have added to his self-proclaimed aura of genius. But it hasn’t. But it must! Well it just hasn’t. Bitcoin has value now. Point disproven. But Taleb could still be right about some future fiasco for the new digital gold. Like the unlikely but possible scenario of people losing interest in the millions and billions of dollars or equivalent gold or land they stored in it. Or the unlikely but possible scenario that millions of passionate programmers will suddenly prefer fishing to coding. But still: Taleb could turn out right that Bitcoin fails eventually, so why shoot himself in the foot with the childish “must be zero now“?
Talking about blasé intellectual vocabulary: Taleb constantly flaunts the economic term “numeraire”. What is it? Google barely digs up the definition from investopedia.com:
Numeraire is an economic term of french origin, which acts as a benchmark in comparing the value of similar products or financial instruments. The word numeraire translates as “money,” “coinage,” or “face value.”
Ah oké, it’s money. But Google floods the search pages with a cryptocurrency called Numeraire (NMR) from the blockchain based Numerai Tournament project to create the worlds largest hedgefund based on AI and machine learning. What’s the value of NMR? $ 32,10 at the time of writing and that’s a shitcoin or far-fetched-coin if there ever was one. But let’s all agree that it must be zero now! But it isn’t! It just won’t.
Taleb spends a whole paragraph proving himself oblivious to the Lightning Network, trying to disqualify Bitcoins payment utility. This is like someone trying to disprove the benefits of air travel by saying that in the Wright Brothers plane there is only room for two persons. Has Taleb even heard about Lightning? About Strike? About El Salvador? About Bitcoin Beach?
Yes he actually has! He writes: “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.” So actually there is a plane that can hold more than two persons, but that’s just fanfare. Air travel will never take off. But Taleb actually did study Bitcoin a bit. He even read the Satoshi whitepaper, and quotes it correctly, identifying Bitcoins core components:
Bitcoin makes use of three recent technologies: 1) the hash function, 2) the Merkle tree (to chain blocks of transactions tagged by the hash function), and 3) the concept of proof of work (used to deter spam by forcing the agent to use computer time in order to qualify for a transaction) —technologies that, ironically, all came out of the academic literature.
Why is it ironic that Bitcoins core components came from academia? The core double SHA-256 cryptography even stems from the military. Who cares where something that’s working, comes from? Taleb gives himself away moments later when he snubs the “onerous energy demands on the system”, when he proposes that this energy would better have been allocated to “other computational and scientific uses”. So Taleb is so much into academia, that he’d rather do some more dubious economic modeling, than help create the internet of money. Good for Peter Thiel that he’s funding bright students to leave the university. So Taleb is not only a champagne nocoiner but also one that single handedly drags the trillion dollar Bitcoin project into the ivory tower to hold it to his academic standards.
But Taleb flaunts to be a pragmatist which he is not. He’s fully an academic. It is pure hypocrisy when he writes:
We only judge a technology in how it solves problems, not in what technological attributes it has. […] 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.
Completely ignoring how Bitcoin actually does solve problems within itself and in the world, Taleb splatters his paper with a handful of pretty colored boxes supposedly containing gems of “wisdom” like:
Comment 1: Why BTC is worth exactly 0
Gold and other precious metals are largely maintenance free do not degrade over a historical horizon, and do not require maintenance to refresh their physical properties over time. Cryptocurrencies require a sustained amount of interest in them.
Again: why start with the shot in the foot? The rest of the statement is spurious in the sense that one might just as well have written about the historical phases of metallic dilution of gold and silver and subsequent purification. One might just as well have written about banks and standing armies required to protect gold and silver treasuries. And yes, no maintenance of the precious metals itself, but of the storage.
People care about money
Then what about the sustained interest? It is safe to say that the thing that has sustained interest since its inception is …. MONEY. Gold and silver have proven themselves effective stores of wealth and only thus have sustained interest. Bitcoin will have sustained interest as long as people perceive it to be money and a store of value. Bitcoin can only lose its sustained interest when people stop seeing and perceiving it as money. But that is exactly the point we are arguing. If bitcoin is money, it will remain money and keep sustained interest. If it isn’t, it wouldn’t. But this circular reasoning decides nothing.
Freaked out cannibal
What’s more: if future developments would plunge us back into some barbaric cannibalistic dark age with neither electricity nor internet, Bitcoin would probably be off the radar for a while. But at the same time iron spears and swords would surpass gold and silver bars in value. Then some future reemerging civilization could choose their money freely. And God knows it could be a new coin and blockchain, or some protocol that would allow remaining funds from intact hard wallets to hook into resurrected blockchains. Come to think of it: what about parents who make sure their children learn the families private keys by heart. When encountering a freaked out cannibal in the jungle what would you rather hold: a bar of gold in your hand or a private key in your head. We are wishing Taleb good luck with his choice.
More circular arguments from Taleb:
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.
Path dependence is exactly why the Austrians call for methodological dualism. In physics or biology proofs will emerge regardless of the research paths taken. In all social matters like religion, vision, motivation, mindset, money, power, the path taken does matter indeed. And here we are over a dozen years into the path taken when Wallstreet was bailed out by the FED in 2008. Had they not done so Satoshi Nakamoto might have kept fishing. But they did. And he didn’t. He launched Bitcoin. Guarded it’s infancy. And then let it go on its journey. It hasn’t failed at anything since. It would even be quite hard to formulate what “Bitcoin failing” would exactly mean. Failing at what? Failing in what?
Taleb predictably brings up his hobby horse, the Lindy effect, even while not naming it:
As discussed by this author , 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.
O boy, how academic with rigorous scientific annotation and all. This author  refers to a book called Anti-fragile by a certain N.N. Taleb, whoever that might be. But sure. He has a point. Nobody argues that the 6000 year history of gold as a store of value isn’t a strong point of this asset. No wealth manager would ever advise to sell all gold and go fully into crypto. That’s something only sons of Peter Schiff would ever do. I wonder if Taleb has a son and if he’s into Bitcoin? So yes, even if it is highly likely that Bitcoin will eventually be supplanted by a better digital money, say Ethereum, Dogecoin, Algorand or some coin that emerges in say 2140, it also might just not. One percent (Taleb’s math) is pretty unlikely but not impossible. Would I bet some money on a 1% chance to win a million? Heck I would. So at least Ray Dalio wins the argument here when he recently concluded “that Bitcoin is an option to a potential store of value”. He also called it “one heck of an invention”. And haven’t all “old” things started out as “new”? Just saying.
So one can expect one’s gold or silver possessions to be around physically for at least the next millennium, on top of having some residual economic value then for the same reason, by iteration. Metals have ample industrial uses with demand elasticity (and substitution to other raw materials). Currently, half of gold production goes to jewelry, one tenth to industry, and a quarter to central bank reserves.
Well so cool to hodl gold and silver for another millennium. Cannibals and all. If Taleb has two kids, who each have two kids, who all survive the misery and procreate again, after 30 generations Taleb’s offspring will number over a billion. So good for them they can all still own a milligram of N.N.’s ton of gold. Wouldn’t it be appropriately modest to just analyse if an old or new store of value could project society just a few generations ahead creating a financial system that just wouldn’t usher in “a revolution in the morning” to quote Henry Ford?
Another colorful box splattered onto the paper:
Principle 1: Cumulative ruin
If any non-dividend yielding asset has the tiniest probability of hitting an absorbing barrier, then its present value must be 0.
He keeps hammering away with a proof like: if A and Z then a crocodile must be a mammal. Well a crocodile is no mammal, so A and Z are not true then. So then Bitcoin or crypto in general must be “dividend” yielding assets. And they are. DeFi does all the things. By a priori and repeatedly disproving himself – since most coins have non-zero value – we are boxing against an opponent who keeps hitting himself in the head. And what the heck is an “absorbing barrier”? A certain N.N. Taleb wrote a paper about it in 2018:
An absorbing barrier is a point that you reach beyond which you can’t continue. You stop. So, for example, if you die, that’s an absorbing barrier. So, most people don’t realize, as Warren Buffett keeps saying, he says in order to make money, you must first survive. It’s not like an option. It’s a condition. So, once you hit that point, you are done. You are finished. And that applies in the financial world of course to what we call ruin, financial ruin.
If Taleb is so much on one page with Buffet about staying alive …. what’s it with the thousands of years then? Any hope of surviving that long? But his formula is truly helpful, because look: Bitcoin is non-zero now, so it must not even have the tiniest chance of hitting an absorbing barrier. That’s even more Bitcoin maximalist than Max Keiser, Robert Kiyosaki and Michael Saylor combined. None of them would postulate that Bitcoin hasn’t even the tiniest chance of ending in a fiasco.
We read on with a heavy heart:
The difference between the current bitcoin bubble and past recent ones, such as the dot-com episode spanning the period over 1995-2000, is that shell companies were at least promising some type of future revenue stream.
Yes so what? So Bitcoin is bubble like and it is different from former ones. Quod erat demonstrandum. Thanks again pal! Yes Bitcoin is fully new. A new category. A new thing. Like, like, how to explain the self driving car to Julius Ceasar? It’s like a chariot, but different. Horses at least eat hay.
Then there is a lot to do with volatility in Taleb’s pseudo-scientific deconstruction of Bitcoin. But how volatile was gold in the first 12 years of it’s use as a store of value? Has he even fathomed the question? I guess in those early days some hunter gatherer was walking about with a clump of gold for some days, feeling mighty powerful, but then got bored with it, dumping it in pursuit of some pretty game. Maybe then he regretted throwing it away and went back to look for it. Like the tragic tales of early bitcoiners losing their keys.
The first 12 years of gold
Oké, deal: let’s academically archeologically research the first 12 years of the adoption of gold as store of value and the volatility in those days. One day you’d kill your neighbor for it, or sell your wife, the next day you just forgot where you dropped the damn shining rock. How about that savage volatility? And then some bearded guy with a “N.N. Shaman” door sign starts telling you something that new must have zero value now.
Taleb finds more fundamental flaws in crypto:
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.
This is a somewhat unjust way of calling cryptocurrencies inflationary just because they are new and have to bring more and more coins into circulation. In reality this is done in a subtle manner that makes these currencies deflationary rather than inflationary, either by simply burning away amounts of coins or with innovations like the Bitcoin halvings.
Taleb does have a point that “ahead of its utility” already a large group of enthousiasts and supporters get to hold coins with against Taleb decree a non zero value. Taleb completely contradicts himself when he points out that in this way a new crypto elite is being formed with a fully classic wealth distribution of 20% of the people holding 80% of the wealth. What wealth? Wasn’t the value supposed to be zero now?
A cartel of billionaire HODLERs
No Taleb actually predicts a future with a cartel of billionaire HODLERs. You don’t believe it? Well here it is. His words:
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.
Balaji Srinivasan has called this the Billionaire flippening: the moment when more than half of the worlds US dollar billionaires are Bitcoin or crypto billionaires. Again Taleb paradoxically comes forward as a Bitcoin maximalist. And yes from the social justice standpoint it is a valid question how desirable it is that a bunch of fringe developers and eccentrics wearing hoodies walk away with all the wealth? But that’s not zero then.
Too volatile to fail?
We must grant Taleb some sense of humor when he ponders: “Is Bitcoin too volatile to fail?” No it’s not. Bitcoin could fail. Nobody ever said it couldn’t. And certainly the volatility is a boon only for successful day traders and a negative for everybody else. HODL and Daily Cost Averaging (DCA) have been invented as an answer to the volatility by people passionate about the technology and the perspective it opens for them and for society. HODL and DCA are also still giving the middle class a good shot a becoming very wealthy with Bitcoin.
Yes, Taleb is right: wealth will be redistributed. From nocoiners to Bitcoiners. And yes people still not buying after 12 years of thorough beta testing, rob themselves of a tremendous opportunity. We cannot pity the stupid. And we need not pity the truly poor who can only ever dream of owning some Satoshi’s. In El Salvador people won’t get rich any time soon, but at least they get banked! But that’s where Taleb claims the blockchain hasn’t ever had a true utility.
Crypto nouveau riche
And yes the crypto nouveau riche (we speak french too) will move into the centers of power like the Rothschilds did, like the Rockefellers did, like the big tech billionaires are doing. But no Mr. Taleb: a big stake in Bitcoin doesn’t offer any hopes of changing the Bitcoin network to ones noble or nefarious goals. It cannot be done. Proof of Work bars it. But yes you had rather used the energy for more academic studies.
Bitcoin Pizza Day
Then Taleb goes some lengths into explaining why Bitcoin is neither really libertarian nor does it adhere to Austrian economics. But neither are anywhere in Satoshi’s whitepaper. So is Taleb trying to disprove or at least debunk Bitcoins validity or is he just shaming what this or that group are saying about the NEW MONEY that just appeared out of nowhere and has all kinds of people trying to bend it to their will and pursuits? Again: Bitcoin doesn’t care what anyone says about it. In the beginning it was just a scientific hypothesis, then a beta testing software, but from Bitcoin Pizza Day on May 22nd 2010 onwards and certainly after dollar parity was reached on February 9th 2011, the cryptocurrency sprang to life, got a soul, became a living thing. A Black Swan moment maybe?
The slogan “Escape government tyranny hence bitcoin” is similar to adverts extolling the health benefits of cigarettes.
Again: nowhere it says that Bitcoin is against government. It is supposed to be a better form of money or numeraire if you prefer academic French to plain English. Bitcoin is against central banking maybe. It’s mission is to create a decentral permissionless trustless system. Taleb proposes Sicilian Maffia style lineage as a proven way of organizing trust. The maffia has been around for hundreds of years, so let’s just keep it. Why ever innovate? And again it is apparent that Taleb doesn’t have the overview of the crypto landscape. He bashes Bitcoin for the transparency of its blockchain, that could easily be misused by agencies like the FBI, but he doesn’t mention the several proven 100% anonymity coins out there. Like Zcash. The Sicilian Maffia is certainly using it. The current price of ZEC? A little over $100. Again non zero. But it must be zero now!
Then Taleb suddenly reveals his hind thought in all of this:
This does not mean that a cryptocurrency cannot displace fiat – it is indeed desirable to have at least one real currency without a government. But the new currency just needs to be more appealing as a store of value by tracking a weighted basket of goods and services with minimum error.
Oilcoin & Basketcoin
This pretty much sounds like the mission statement of Taleb’s soon to be announced Initial Coin Offering (ICO). Such things have already been done: there is an “oilcoin” for example backed by oil reserves. And a “basketcoin” that’s actually a basket of seven cryptocurrencies. So Taleb could certainly create his own privacy guaranteed shitcoin with a basket of Big Mac, family car price, gasoline price, college tuition and a fresh hair dye. As a token I propose the Taleb (TLB). Sounds pretty cool. May the best coin win!
Taleb gives the shortest version of his findings like this:
In its current version, in spite of the hype, bitcoin failed to satisfy the notion of “currency without government” (it proved to not even be a currency at all), can be neither a short or long term store of value (its expected value is no higher than 0), cannot operate as a reliable inflation hedge, and, worst of all, does not constitute, not even remotely, safe haven for one’s investments, shield against government tyranny, or tail protection vehicle for catastrophic episodes.
The inflation hedge bit he argues along the lines of historic silver and gold squeezes. I won’t go into that. I wonder why it is even necessary to use any argument or analogy here when one is convinced that the price of Bitcoin is already zero now? Again it seems that Taleb seems to argue that an improved BTC or completely new coin like TLB could be just fantastic.
To close it off: how and where does Taleb prove that Bitcoin cannot be a store of value? The answer is simple. He refers to somebody else who had already “proven” that back in 2017. Here we at least find something of value in Talebs paper. Number 17 on the list of sources is: M. W. Spitznagel, “Why cryptocurrencies will never be safe havens” Von Mises Institute, 2017. Of course we read this one immediately. Mark Spitznagel seems to be quite some guy. He wrote The Dao of Capital in 2013. Ron Paul wrote the preface and it goes:
“Spitznagel brings Austrian economics from the ivory tower to the investment portfolio.”
So the opposite movement that Taleb made, who went from being an in the trenches trader to being a fully academic wisecracker. So what proof do we find with Spitznagel? Firstly his 2017 essay is written in the midst of the ICO-bubble and most of what he says only goes against this proliferation. He states that as ever more coins enter the market the value of them all will be diluted. But he also admits that even gold will lose value as crypto gains value since the store of value function is a zero sum game. So does he really destroy crypto? Let’s read on …
Cryptocurrencies are a very significant value-added technological innovation that calls directly into question the government monopoly over money. This insurrection against government-manipulated fiat money will only grow more pronounced as cryptocurrencies catch on as transactional fiduciary media; at that point, who will need government money? The blockchain, though still in its infancy, is a really big deal.
If you wanted to create your own private country with your own currency, no matter how safe you were from outside invaders, you’d be wise to start with some pre-existing store-of-value, such as a foreign currency, gold, or land. Otherwise, why would anyone trade for your new currency? Arbitrarily assigning a store-of-value component to a cryptocurrency, no matter how secure it is, is trying to do the same thing (except much easier than starting a new country). And somehow it’s been working.
Viewing cryptocurrencies as having safe haven status opens investors to layering more risk on their portfolios. Holding Bitcoins and other cryptocurrencies likely constitutes a bigger bet on the same central bank-driven bubble that some hope to protect themselves against. The great irony is that both the libertarian supporters of cryptocurrencies and the interventionist supporters of central bank-manipulated fiat money both fall for this very same fallacy.
Cryptocurrencies are a very important development, and an enormous step in the direction toward the decentralization of monetary power. This has enormously positive potential, and I am a big cheerleader for their success. But caveat emptor—thinking that we are magically creating new stores-of-value and thus a new safe haven is a profound mistake.
Cheerleader for the success of crypto
So Taleb builds on a self proclaimed “cheerleader for the success of crypto” in his rebuttal of Bitcoin. Someone who says that it can’t be done, but admits that somehow it is working. Somebody who admits that “the price of Bitcoin can make further (and further…) new highs until it doesn’t”. So no zero value now with Spitznagel. And the scenario that would end the Bitcoin party in Spitznagels eyes is a government decree effectively banning crypto. But what if it’s not the Bitcoin party that ends soon, but the central bank driven fiat party? What if it all ends in a earth shattering hyperbitcoinization event? Who will tell? It’s history in the making. It’s not physics or biology. It’s social and can and will come out just as we build or destroy it. Just as we win or lose the “propaganda war”. Or call it crypto marketing if you like.
I’m dying to read Spitznagels new book coming up in september: Safe Haven: Investing for Financial Storms. Now that the ICO bubble is long bust and more serious DeFi is on the rise, will he have changed his judgement on crypto? Probably not. Taleb’s preface to the book is already out on Medium. And it’s a nice portrait of both men as friends and colleagues and their origins as pit traders. Quote:
He even managed to fool the author Malcolm Gladwell who covered us in the New Yorker into thinking that he would be one breaking up a fight at a bar while I would be one to initiate it.
A spitznagelish investor will buy Bitcoin in 2033
Spitznagel apparently is synonym to the most dull, proven, completely risk-free investment strategies. Good for the already very wealthy, but not for the poor or for boomers who fall prey to the Bitcoiners mantra: “be happy staying poor Boomer”. The time for a spitznagelish investment strategy to get into Bitcoin would be say in 2033 when Bitcoin’s volatility is finally decreasing, the price peg is around $ 1,5 million and prognostics give the asset a high likelihood of doing another 10% that year. Of course fully risk averse family offices with no interest in giving the world a better money will have nothing to do with Bitcoin for another decade or so.
Spitznagel is not on Twitter, but we did find a true gem from a flemish podcaster and writer who tweets this in reply to Max Keiser:
On Kobe van Reppelen’s website we hardly find him to be an economist or investor but we do find that he is working on a Dutch translation of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness (2020) from Morgan Housel.
Good honest espresso
The “sustained interest in money” seems to be a given. Anything that is scarce, fungible and is perceived as money can and will be money and a store of value, simply because it will retain sustained interest. And if it has to be mined, it will be mined. Digitally with servers or physically with caterpillars.
Taleb lovingly recounts the story of the Italian gettoni, that were coins for making phone calls from phone booths back in the day. They would buy you an espresso anywhere. Good honest espresso. Until phone booths no more. Isn’t that a perfect paradigm for Bitcoin as a store-of-value? That we couldn’t care less if it will “hodl a millenium” in order to give our billion strong offspring each a measly few satoshi’s? That it would just be fine, just really fine, if it allows us to transfer our wealth to our children and grandchildren, if it buys us a few more generations of a workable solution for rewarding work and distributing wealth, if it brings non-inflationary mobile phone based savings accounts to the deepest jungle, the hottest desert and the poorest slum, if it offers some fun new investment and lending options and that it offers a really, really exciting experiment of doing away with central banking for a while?
The Austrians would want to win that battle no matter what Taleb says …