I often write on Quora.com, where I am the most viewed writer on financial matters, with over 359.2 million views in recent years.
In the answer below I answered a simple question – why does Nassim Taleb think Bitcoin is going to zero?
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Source for all answers – Adam Fayed’s Quora page.
Why has Nassim Taleb now reversed his course and now mock Bitcoin and cryptocurrency?
Firstly, who is Nassim Taleb. Well, he studies risk and probability and became famous after predicting the financial crisis in 2007–2008.
He used to like Bitcoin as an alternative currency, not an investment. As he says in the video below, he was fooled by it:
You can’t blame him for that, that was the originally stated ambition for Bitcoin – replace the USD and other fiat currencies and not be an investment.
Taleb’s argument’s in his videos and paper come down to these points
- It has failed in its original intention to become a currency. You can’t pay for many things in Bitcoin, and it isn’t practical to have a currency that can fall or rise by 20% (or more). What is more, it is more expensive than things like Visa and MasterCard, and you can’t even make as many transactions per second. So, it is slower. That can’t complain about mobile money already seen in places like Kenya and China, which is faster than traditional finance.
- Bitcoin has not proved to be a hedge against “tyrannical government control”.
- Many Bitcoin advocates have changed their positions and stated it is a source of value like digital gold or a hedge against inflation. It can’t be either of those things. Rather, it has become a speculative asset.
- Following on from the last point on it being a speculative asset, the only thing making Bitcoin go up (or down) is supply and demand, as there is no yield or dividend. Therefore, it has some properties of an open Ponzi scheme, where people know it is speculation and not based on fundamental value. The fact that some meme coins have also done very well, despite being started as jokes, is part of his argument.
- Whilst gold might not have been the best investment in history, it doesn’t depend on getting loads of media or needing miners to the same extent. To quote him “Gold and other precious metals are largely maintenance-free, do not degrade over an historical horizon, and do not require maintenance to refresh their physical properties over time. Cryptocurrencies require a sustained amount of interest in them”. Gold and silver is also used in jewellery and have been around for thousands of years.
- Path dependency. As he says “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 period of time — and of course, we are not sure of the interests, mindsets, and preferences of future generations. Once bitcoin drops below a certain threshold, it may hit an absorbing barrier and stays at 0 — gold, on the other hand, is not path-dependent in its physical properties ”. So, again, the dependence on miners is an issue.
- Bitcoin promises to be 100% hack-proof. It is one of the areas it has succeeded in. However, it needs to maintain that 100% record. Other assets won’t collapse to zero if they are hacked once. If bullion is stolen tomorrow, gold won’t go to zero, as such a promise was never made.
- 99% of technologies are eventually replaced by something new. Even many people buying Bitcoin, who are bullish for the next ten years, think it will get replaced by a new digital currency which is better or something different, so they by definition know it is an open ponzi as they plan to sell when the price is high to some fool. So, this is a huge risk for Bitcoin’s ultra long-term future. Therefore, “If any non-dividend yielding asset has the tiniest constant probability of hitting an absorbing barrier (causing its value to become 0), then its present value must be 0”.
- In past bubbles, like dot.com, the difference was that at least the companies were promising future revenues streams. Most of the companies failed and never did, but some of those original companies (like Amazon) succeeded. Bitcoin isn’t promising a dividend in the future or a revenue stream of any kind.
- There is a contradiction. “More generally, the fundamental flaw and contradiction at the base of most cryptocurrencies is, as we saw, that 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”.
The absorbing barrier does not have to be 0 for the price to spiral to 0 upon hitting the barrier. This is similar to saying “if the heart rate drops below ten beats per minutes, it will be 0 (death)” — nor does it necessarily have to be caused by a drop in price. Nor does it have to be endogenous.
To counter the effect of the absorbing barrier, the asset must grow at an exponential rate forever, without remission, and with total certainty.
Belief in such an immortality for BTC — and its total infallibility — is in line with the common observation that its enthusiastic investors have the attributes of a religious cult.
- Despite it all, Taleb does think it is desirable to have at least one currency that can displace government ones. He merely demonstrates why Bitcoin is not that.
- Bitcoin isn’t a safe heaven, which was shown by the fact it went down to 3k during the worst of the stock market crash in March 2020, and usually falls when people are feeling more risk-averse. It only recovered and went to new heights once people were “risk-on”. If the market rout had turned into something like the 1930s when risk-off was a feature for a decade or more before markets recovered, what is to say that Bitcoin wouldn’t fall to 100 or 0?
- It is wrong to think that Bitcoin is libertarian (not that political ideology should be the reason to invest in something).
- When he has pointed out the contradictions in Bitcoin to some of the more sophisticated enthusiasts, they admit it but say “well at least it has a great technology underneath it (blockchain)”. There is little evidence for this.
You can see the full paper here – anybody thinking about (or currently) investing should read it with an open-mind.https://www.fooledbyrandomness.com/BTC-QF.pdf
Of course, the naive will point to the price rising, but that is irrelevant, just as prices falling don’t indicate that something has a fundamental value of 0 either.
Whether Bitcoin goes up 10x in a year or falls by 10x, is irrelevant to his argument about the long-term.
As he says in his video, Bitcoin can rise like tulips for even many years, but that doesn’t negate his points on the long-term outlook.
Only time will tell if he is proven right. It might take decades to find out if he is right. He might even be dead once we know, with 100% certainty, if he is right.
What I do know is, regardless of whether he is proven right or wrong is:
- The true believers will dismiss his research, as it is kind of like a religion to them.
- The biggest reason why people buy Bitcoin is fear of missing out and greed. That is normal and human nature. It explained the GameStop issue. However, the point is, that the vast majority of people buying Bitcoin during the upswings don’t understand why they are buying it, except that it is going up.
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Adam is an internationally recognised author on financial matters, with over 548.6 million answers views on Quora.com and a widely sold book on Amazon and a contributor on Forbes.