A few things I’d like to get off my chest before I get on with my rebuttal:
- I’m a big fan of Nassim Taleb’s work. No book has impacted the way I live my life on a day-to-day basis more than the Incerto except the Bible and maybe Montaigne. Can’t think of a bigger compliment than that. Taleb’s ideas are monumental and timeless.
- Taleb on twitter is a real disappointment. I don’t know what Taleb is like in real life but one thing I do know is that he would never speak to me like he does to people on twitter because he’d be on the floor apologizing profusely. Being an obnoxious cunt on twitter is the opposite of having skin-in-the-game and no amount of saying “in real life I’m actually friendly” makes up for that because it just proves that you’re an asshole when the stakes are lower.
- Taleb writing academic papers while people in the real world keep tinkering and building out bitcoin is the content I come on twitter for.
None of the above has anything to do with the rebuttal, but since he keeps calling me a bitidiot for having the gall to believe that bitcoin could possibly one day be a successful currency, I thought it would just be fair to call him an Intellectual-Yet-Idiot, but don’t worry Nassim, in the real world I’m actually super friendly and I smile a lot.
On to the actual rebuttal:
Before I get into a point-for-point discussion of his self-proclaimed “blackpaper” on bitcoin I’d like to highlight some high-level things. Firstly, Taleb’s paper has added nothing new to the discussion on bitcoin that hasn’t be talked to death on bitcointalk.org since 2011. If you want to see a rebuttal of everything in Taleb’s paper, there are many, much more elegant rebuttals that have been written long before his “blackpaper” had even been written.
Secondly, throughout my rebuttal you should notice that a lot of our disagreements are disagreements in time. Taleb’s focus on what bitcoin is today is actually just a strawman for the much more interesting question of what bitcoin could become. Taleb’s premature declaration of the failure of bitcoin essentially boils down to seeing a newborn baby that can’t walk yet and declaring the baby to be a failure as a human being. Peak Intellectual-Yet-Idiot.
“The proof of work method has an adjustable degree of difficulty based on the speed of transactions, which aims, in theory, to keep the incentive sufficiently high for miners to keep operating the system. Such adjustments lead to an exponential increase in computer power, making at the time of writing onerous energy demands on the system – energy that could find substitutes in other computational and scientific uses.”
Here he talks about the difficulty adjustment and seems to get it but then the sentence afterwards proves that he doesn’t. The computational power needed will only grow exponentially if the price of bitcoin increases exponentially. Once the bitcoin price stabilizes as it gets fully adopted (in theory of course) the difficulty adjustment will ensure that energy consumption won’t continue to grow exponentially. It was literally introduced to the protocol to enforce equilibrium.
Secondly the claim that “energy that could find substitutes in other computational and scientific uses.” is a moral claim and has no place in this discussion. Who is Taleb to decide how and for what ends energy should be used? Maybe I think creating a monetary network that keeps parasitical politicians away form the money printing spigot is a very valuable use of energy? Either way, let the market decide what energy is used for.
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
This is in fact incorrect as gold and precious metals (to function as a SoV or MoE) requires significant costs to maintain, for instance verification, storage, and transport costs, all of which bitcoin significantly improves upon in that I need only run a node on a cheap computer to store and maintain billions worth (theoretically of course) of bitcoin.
Furthermore, the fact that bictoin doesn’t have physical properties means that bitcoin is immune to physical degrading which is another improvement to mere physical metals like gold and other precious metals.
This does off course require maintenance of the bitcoin network through miners and node operators, which leads into the next point:
“Cryptocurrencies require a sustained amount of interest in them.”
So does gold and precious metals. Given that value is subjective, this is essentially true for anything in the world not directly related to survival.
In this comment section, which is essentially just circular reasoning (he calls it ergodicity) saying that because bitcoin can one day be worth zero, it should be worth zero now, Taleb makes the assertion that because gold (a non-yielding asset) has been around for 6,000 years it can be expected to be around for another 1,000 years, effectively getting around the “path dependence problem” that bitcoin itself faces. I agree with this point but disagree with Taleb about the reason gold has been around for 6,000 years (hint: it’s not because of it’s physical or industrial use).
Gold has a monetary value far above it’s industrial use (by the way Taleb’s ‘industrial uses’ of gold in his paper are majority monetary uses actually) and that is because money is a technology that is used for trade. That technology has certain characteristics (scarcity, divisibility, fungibility, etc), most of which bitcoin improves upon (compared to gold). None of these qualities needs to be purely physical as Taleb seems to assert, no reason they can’t be digital. Because gold has proven over 6,000 years that people require a technology called ‘money’ I’m quite happy to predict that they will require one for the next thousand years. And given bitcoin’s better ‘money’ attributes I think bitcoin is better fit than gold to fulfil that role. In fact, given the existence of bitcoin, gold should probably be valued closer to its industrial value today.
I could be wrong about bitcoin being that technology, of course, but by claiming that all non-yielding assets should be worth zero (if it has any possibility to hit an absorption level) in a world that has proven that it requires a technology for trading means that he’s wrong about the path dependence of all non-yielding assets. And if it’s inaccurate for all non-yielding assets, it’s inaccurate for bitcoin. This is also why he conveniently leaves out collectibles and art from the paper’s discussion.
By the way, if anything that is a non-yielding asset and has the smallest possibility of hitting an absorption barrier should be valued at zero, given the empirical tendency of fiat currency to hit that barrier, shouldn’t the dollar be valued at zero? Something smells like circularity dressed in fancy ergodicity terminology. And save me the “I can earn interest on my dollar” bullshit. I can earn interest on my bitcoin today as well. And if that’s your classification of for a yielding asset then the whole ergodic argument is nonsensical anyway.
The question on bitcoin and Lindy is not whether bitcoin is Lindy, but whether it could be Lindy. Given that >99% of new things are replaced by other new things, it is highly unlikely that bitcoin will end up existing for the next 1,000 years, but that was also true for all things that ended up being Lindy. Practically speaking, Bitcoin is a question of portfolio sizing more than it is a question of whether it’s worth $0 or $1,000,000.
“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 the transaction volume of underlying transactions in them. Hence the total failure of bitcoin as a currency has been masked by the inflation of the currency value, generating paper profits for a large enough number of people to enter the discourse well ahead of it’s utility.”
That bitcoin has an inflationary monetary policy up to 21m bitcoin is a well-known fact. That this was created to incentivize and reward miners to secure the network is also a well-known fact. I fail to see how Satoshi could have done it more fairly and openly that an open-source software program. I also fail to see how inflation ‘inflates’ the currency value, if anything it reduces the value by creating selling pressure in the open market as miners need to sell bitcoin to pay operational expenses.
Taleb further says that bitcoin will need their miners in perpetuity as if that is some sort of revelatory negative that nobody has thought of. All systems of trade need some need some for of maintenance. Gold requires storage and verification. Fiat needs wars (tongue-in-cheeck but that the banks make up a lagre part of GDP proves my point anyway). Bitcoin requires miners. Once all bitcoin has been mined, miners will need to be piad in fees to maintain network security. If the market values network security, they will pay the appropriate fees.
And lastly, ‘to enter the discourse well ahead of it’s utility’ is again a subjective assertion that is unknowable and shows the authors lack of objectivity.
Comment 2: Success for a currency.
“There is a conflation between success for a “digital currency,” which requires me stability and usability, and speculative price appreciation.”
This whole comment section is essentially a strawman of what bitcoin is today to what bitcoin can possibly become. Is bitcoin a successful currency today? No, and I doubt any serious bitcoiner would claim that it is. Does that mean bitcoin has failed? No. But apparently serious bitcoin critics are happy to claim that.
Bitcoin is a technology created to become a peer-to-peer electronic cash and it is in the process of adoption. The adoption WILL be volatile, the technology WILL evolve; to believe any currency can be bootstrapped from the ground up without volatility is peak IYI; to believe that there is a fairer way to create a free-market currency than to organically and non-coercively grow it from the ground up is peak IYI.
A more interesting question on bitcoin volatility is whether it will decrease as it gets adopted further. Taleb’s answer to the interesting question is to take 12 years of history and conclude that, in fact, it won’t.
“Transactions in bitcoin are considerably more expensive than wire transfers or other modes, or ones in other cryptocurrencies, and order of magnitudes slower than standard commercial systems used by credit card companies —anecdotally, while you can instantly buy a cup of coffee with your cell phone, you would need to wait ten minutes if you used bitcoin.”
“First, let’s discuss the demonetization of gold. In 1971, the U.S. government terminated the Bretton Woods Agreement, ending the convertibility of the U.S. dollar into gold. Gold stocks were growing too slowly, and, as mentioned earlier, much of it went to jewelry and industry —there was not enough gold to keep up with economic growth.”
Both reasons Taleb uses for the demonetization of gold, i.e. state intervention and lack of divisibility, has been improved upon by bitcoin. Will bitcoin be permissionless and censorship resistance enough to withhold state intervention? Remains to be seen. Is there enough bitcoin in the world to keep up with economic growth? Given that bitcoin is infinitely divisible means that’s a resounding yes.
*This section is actually a nice inadvertent advert for the necessary adoption of bitcoin by the way.
Comment 3: Payment system
“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.”
Again, I can’t really argue the details of this segment as things stand today. In fact, I agree with basically everything Taleb asserts in this section. But again, that is only half the question. All currencies that weren’t issued by the state, i.e. free money, grew organically through phases.
Those phases normally are classified as
2. Store of Value
3. Medium of Exchange
4. Unit of Account
Note that none of these phases are mutually exclusive and there should be significant overlap and jumping between these phases. In the early days, when bitcoin wasn’t tradable for dollars, they were purely neat collectibles for computer scientists and cypherpunks. Then it made the jump over SoV to Medium of Exchange when Laszlo bought two pizzas for 10,000 bitcoins. And since then, bitcoin has fluctuated between the three stages with unit of account almost never being used (except for citizenship in El Salvador – 3 bitcoin). For me personally bitcoin fluctuates between the first three, but I see it mostly as a speculative investment driven by the hard money fundamentals and the belief that adoption will increase over time. It’s an investment in a peer-to-peer electronic cash system that is in the process of adoption.
That few things are priced in bitcoin today should come to no surprise to anyone. Question is whether more things will be priced in bitcoin in the future. My answer is a speculative yes.
Few nitpickings on this segment:
“Bimetallism did not last long, nor could commodities last as currencies in developed economies.”
Taleb seems to buy the narrative that bitcoin is digital gold even more than bitcoiners do. Bitcoin is not gold; it’s better in certain ways and worse in others. As discussed above, the digital nature of bitcoin makes it infinitely divisible and therefore the argument made that commodities don’t last in developed countries is irrelevant. Bitcoin is not a physical commodity. It has other trade offs to gold, to be sure, but its digital nature brings along certain advantages as well.
“More generally, the reasons multiple currencies exist (in the absence of pegs) is because there is not enough globalization and markets are not entirely free between currency zones. And some goods and services, “such as haircuts and auto repair cannot be traded internationally” ; they are not, to use the language of quantitative finance, arbitrageable.”
Then use bitcoin for internationally “arbitrageable” transactions and local currencies for local expenses. This does not undermine the case for bitcoin at all. In fact, an apolitical currency is better for international arbitrage.
“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.”
Again, for now. Plus, there are examples of states allowing bitcoin to be used to pay taxes. El Salvador, Wyoming et al.
Bitcoin as a hedge for inflation:
I would like to state here than I fully agree with with Taleb that Bitcoin is not a hedge for inflation. The easy money propping up everything in the world is propping up bitcoin too. If you believe bitcoin is a hedge for inflation, good luck to you. This is the same for the “bitcoin as a safe haven” narrative. You have to be some kind of stupid to have gone through March 2020 to believe yourself when you say bitcoin is a safe haven.
But as we continue to transition to a circular bitcoin economy (getting paid in and receiving income in bitcoin) bitcoin becomes a “hedge against inflation” in the sense that there will only ever be 21 million bitcoins. Given that inflation is always and everywhere a monetary phenomenon, an economy based in bitcoin will always have zero inflation, thus eliminating the need for inflation hedges.
This is again a speculative statement that can only be proven in time.
“3.) Fallacy of safe haven, II (protection for tyrannical regimes)”
This is the most egregious error in the whole paper by far. I have always respected Taleb for his rigor, but this is incredibly… unrigorous.
“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.”
Bitcoin transactions are by their nature pseudonymous. This means that they can be tracked across transactions but that the true identity of the person remains hidden (assuming that the bitcoin was acquired through non-KYC measures, which is possible to do). There are other privacy measurements (coinjoins for instance) that make the trackability of bitcoin nearly impossible if done properly. This relies on significant knowledge of how these operations work and very good opsec, but it can definitely be done. If anything, this point shows Taleb’s lack of deep understanding of the bitcoin network and the ecosystem.
“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  —and it did not take long for the FBI to hack the account and restitute the funds.”
“statistically detect and triangularize “anonymous” ransom payments.” Please! If Taleb had done a bit more work other than reading some headlines he’d have known that these people were caught because of terrible key management and probably trusting custodial mixing services. This is a scathing statement on stupidity, not on the bitcoin protocol.
“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.”
To prove the stupidity of this statement please replace bitcoin with the example of the common stock of Amazon.
“It is a wealth transfer to the cartel of early Amazon investors.” Idiot. Why should early adopters who took the investment risk on the bet that bitcoin could become a success not be rewarded? Imbicile!
Taleb concludes the paper with a shitty joke not worth retelling, and a claim that bitcoin is not useful.
I know of many people who use it for many different reasons. As a South African who is subject to a government of complete incompetence and maleficence, I thank Satoshi everyday for creating a network of value transfer that is permissionless and unconfiscatable. I believe it will prove to be one of the most valuable inventions of this century but that remains to be seen.