Nassim Taleb on Bitcoin
A twitter spat unveils a very fragile thinker
I’m a fan of Nassim Taleb. I’ve written about Taleb in the past and had some fun generating Taleb Aphorisms using GPT-3.
I read every book he has written, some more than once, and I usually agree with most of what he has to say. He always gives me something interesting to think about. Taleb was a proponent of the idea of Bitcoin in 2018, but has recently criticized the currency. But when you dig below the surface, you realize its all driven by a personal disagreement
Taleb on Bitcoin circa 2018
I was pleasantly surprised when I saw Taleb’s forward to The Bitcoin Standard. In it, Taleb criticized the meddling of Federal Reserve officials into complex systems.
We are, as I am writing these lines, witnessing a complete riot against some class of experts, in domains that are too difficult for us to understand, such as macroeconomic reality, and in which not only the expert is not an expert, but he doesn’t know it. That previous Federal Reserve bosses, Greenspan and Bernanke, had little grasp of empirical reality is something we only discovered a bit too late: one can macroBS longer than microBS, which is why we need to be careful on who to endow with centralized macro decisions.
As an engineer, I have an aversion to complexity. I’ve spent countless hours building and debugging complex systems, everything from shitty React code and shitty Scala code.
That’s the main criticism I have about the aggressive actions of the US government and Federal Reserve in response to the covid pandemic: the economy is a complex system and altering the money supply so drastically will have unintended consequences.
Taleb continues to praise the idea of Bitcoin:
Which is why Bitcoin is an excellent idea. It fulfills the needs of the complex system, not because it is a cryptocurrency, but precisely because it has no owner, no authority that can decide on its fate. It is owned by the crowd, its users. And it has now a track record of several years, enough for it to be an animal in its own right.
He comes to the same conclusion as I have regarding crypto assets as an insurance policy:
But its mere existence is an insurance policy that will remind governments that the last object establishment could control, namely, the currency, is no longer their monopoly. This gives us, the crowd, an insurance policy against an Orwellian future.
Taleb on Bitcoin circa 2021
By February 2021, Taleb has taken a different tone on Bitcoin:
His main claim is about the volatility of Bitcoin and the people that are investing in it. I don’t know where he gets the idea that the new investors driving up the price are “Covid denying sociopaths”. Perhaps it has to do with The Bitcoin Standard’s author, Saifedean Ammous, who has criticized covid policies.
He even added the jab in his forward:
Was initially written as a foreword to the book by Saifedean Ammous. Note that I do not subscribe to Ammous’ crankish and conspiratorial ideas otherwise.
But it’s not true that Bitcoin was taken over by covid deniers. In fact, I’d argue there has been a lot of institutional interest in Bitcoin that has driven up the price. This is from 2020-Q4 and obviously limited to just a single exchange, but there seems to be a trend of institutions getting into Bitcoin:
It’s impossible to say how much this is driving the price increase and volatility, but I think it’s wrong to say that the price is being driven by some stereotype of Bitcoin holder.
Taleb attacked Bitcoin again in April 2021:
Ideally money should be a unit of account. Partly what makes Bitcoin (and gold) a good unit of account is its scarce new supply. As the world grows wealthier, naturally so should currency. Interest rates adjust to make borrowing possible regardless of the base. Borrowing is less stable if the supply of money can shoot up 25% in a given year as we have seen in 2020.
Taleb seems to be hung up on the recent price appreciation. But given the huge promise Bitcoin holds to becoming the de-facto non-governmental sound money, a dramatic price rise would be inevitable.
I can’t see how any new currency could be priced stably to a basket of goods if everything is currently priced stably in terms of fiat currency. You would have to mimic the same characteristics and flaws in the system we have. But that’s not much of an alternative and when it collapses, you won’t have much of a hedge.
As for deflationary assets, much of the history of gold as a currency has been deflationary. Taleb normally has reverence for these types of things.
Bitcoin as a Ponzi scheme
The argument that Bitcoin is a Ponzi scheme is incredibly dishonest. He may be using the term it in a colloquial laymen’s sense (i.e. current investors paying out older holders) but he should know it’s a technical term that has a specific meaning, which Bitcoin doesn’t fit. I find it ironic, considering Taleb got so trigged by people confusing “standard deviation” with the colloquial meaning of “mean absolute deviation” that we wrote an entire paper on the confusion.
I don’t fully understand his argument about zero-sum mechanics. Is the opposite of zero sum mechanics just inflationary? Do I want positive sum mechanics for a unit of exchange? I just need a unit I can use to keep track of my accounts that’s not subject to the whims of politicians or bureaucrats.
I don’t think Taleb really understands how Bitcoin works. I can’t remember Taleb ever referring to someone else to make his argument, essentially “what he said!” I think this is just continuing his feud with Saifedean Ammous.
So what does Stephen Diehl, the person Taleb retweeted, say a ponzi scheme is?
I claim the economic structure of the bitcoin movement can be most aptly described as a postmodern Ponzi. In a world where even the very existence of the virus that has halted civilization can be questioned who’s to say what is and isn’t a scam or whether bitcoin mining is boiling the oceans — trust me I’m lying.
Yeah, it’s about the covid dude. Fine. How is it a Ponzi again?
A classical Ponzi scheme is a financial fraud run out of smoke-filled rooms of old men shuffling money around bank accounts and manipulating accounting statements to continuously pay out new investors from old investors while maintaining the illusion of returns. In economic terms investing in a Ponzi scheme is a negative-sum game and is a form of gambling like poker or roulette. Gambling is consumption and, unlike in productive enterprises, nothing of value is created from the process. There is a fixed pool of money and each person who makes a profit necessarily makes it from someone else who loses. Any single winner is necessarily paid out by multiple losers. Negative-sum games do not, in aggregate, generate wealth or utility and instead simply redistribute input funds to different participants. There is a negative expected return from engaging in this class of activity.
Got all that? The rest of the article is a word soup on naive Bitcoin criticisms (e.g. just record in an accounting database, not really a thing, it’s speculative, driven by human gullibility). Basically an unhinged rant from someone trying to grapple with
Below is a word cloud of the rest of the article. “smoke-filled rooms” just missed the cut as it only appeared twice.
You either die a hero, or live long enough to see yourself become the villain
The frustrating thing about Taleb is that he pretends that he is above it all. He prides himself as being an independent thinker but when you dig a below the surface, you see a small insecure man. His critics have long noted this but I have not seen this so clearly until the 180 he pulled on Bitcoin all due to a beef with an author.
Taleb feels like Saifedean Ammous, author of The Bitcoin Standard, betrayed him by having a disagreement about covid policies. That’s the downside of Taleb’s binary world, where everyone is either a Fat Tony or an Intellectual yet Idiot. And now Taleb is on a war path to try to disavow anything related to Ammous, even going so far as retweeting someone offering deranged rantings on the topic.
So now, due to a personal beef Taleb has with an author, we have to discard everything Taleb has to say on a topic. This is unfortunate because we need more intelligent voices critical of Bitcoin. As someone who believes in the idea, I would like to know the strongest form of the argument against Bitcoin. And that’s not “it’s a Ponzi scheme” or “it’s too volatile”.
Skin in the game
Taleb mentioned he is liquidating his Bitcoin position, but he never said he has a short position. Until Taleb has a short position in Bitcoin, I’ll take Taleb’s own advice regarding any future proclamations about Bitcoin’s inevitable failure:
To be fair, he did address the idea of shorting Bitcoin in 2017:
But that was in 2017. Since then there have been a number of de-fi services built on top of Bitcoin that allow for all sorts of positions, including options. If I had a chance to bet that a Ponzi scheme would collapse, I certainly would.
I did enjoy some of the trolls in the replies though. Someone mentioned “the market disagrees with you” to which Taleb replied simply “Imbecile!” (since removed — thanks Twitter safety team!).
I also liked this troll:
Final thoughts
I think the world needs sound money. Bitcoin is so far the best implementation of sounds money outside of government control we’ve come up with. It’s going through a volatile time right now, but I think that’s due to the circumstances of covid monetary inflation. Central banks around the world introduced trillions in new money into the economy. Let me see if I can phrase it as a Taleb Aphorisms: “It’s about the money supply, you idiot!”
Now that Bitcoin been around for a decade, we can be reasonably assured that it’ll be around for at least another decade (Lindy Effect - Taleb taught me that).
But why is sound money important? I’ll let Taleb explain:
