Nassim Nicholas Taleb Shellacks Bitcoin and Cryptocurrencies

Nassim Nicholas Taleb has weighed in on Bitcoin and its brethren in a new paper for New York University, Bitcoin, Currencies, and Bubbles, and finds nothing to like. We’ve embedded his analysis below and encourage you to read it in full.

Taleb is far from the only expert in finance to pen a wide-ranging and overwhelmingly negative assessment of Bitcoin and other crypto (which for convenience we will refer to as Bitcoin). Nouriel Roubini published a no-holds barred takedown in the Financial Times in February. Roubini called out its lack of fundamental value, environmental toll, volatility, high transaction costs, and very slow processing.

Taleb’s critique is even more fundamental. We joked early on that blockchain was a technology looking for an application. Taleb confirms that that is still true. From Taleb’s conclusion:

We presented the attributes of the blockchain in general and bitcoin in particular. 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.

Bitcoin fanboys may have tried to shrug off Roubini as a mere doom-oriented economist. They’ll have a much more difficult time dismissing Taleb. Taleb is a quant’s quant and has no patience with poseurs. He starts with a brief overview of the technologies that underpin Bitcoin and includes observations about Bitcoin that derive from currency risk hedging, but it’s not essential to parse them to get the drift of his gist. Even though he is not a computer scientist, he held senior positions in derivatives trading at top tier market participants, and particularly in the 1980s and 1990s, competitiveness in options and derivatives trading was very much dependent on fast IT development and implementation, so the senior traders would often work closely with the developers on the rollout of new trading models and tools. So his asides about IT are not to be dismissed either.

However, Taleb is also famous for suffering no fools, and so calls on readers to step up their game to follow his argument rather than making his arguments op-ed-level layperson friendly. However, the finance-literate will find this paper to be accessible as well as occasionally acid.

Taleb’s overarching compliant is that Bitcoin accomplished none of its supposed aims, including facilitating crime. Its volatility and speculative use makes it unworkable as a currency. One of the comments the paper highlights:

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.

It isn’t a store of value, an inflation hedge or a safe haven either. It isn’t just that Bitcoin did poorly in the Covid panic of March 2000; it’s also not a techno answer to a bank account in a secrecy jurisdiction like Panama or the Isle of Man. From the article:

To many paranoid antigovernment individuals and others distrustful of institutions, bitcoin has been marketed as safe haven —also with the open invitation to fall for the fallacy that a volatile electronic token on a public setting is a place for your hidden treasure.

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. 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 [18] —and it did not take long for the FBI to hack the account and restitute the funds.

Government structures and computational power will remain stronger than those of distributed operators who, while distrusting one another, can fall prey to simple hoaxes.

In the cyber world, connections are with people one has never met in real life; infiltration by government agents are extremely easy. By comparison, the mafia required a Sicilian lineage for “friends of ours” so they could do their own security clearance type of check. One never knows the degree of governmental surveillance and real capabilities.

Taleb makes much of the fact that the value of Bitcoin depends on having miners “in perpetuity”. He points out that other historical currencies, such as gold and silver, even if they had lost their luster and no longer function as inflation hedge or reliable stores of value, still have some fundamental worth due to their use in industry and jewelry. No such possible floor exists for Bitcoin. It similarly can’t be considered to be an asset because it can never generate income. Taleb puts aside collectables since they have what amounts to consumption value, as in enjoyment of their aesthetic qualities.

Let us go deeper into how a currency can come about. No transaction is analytically pairwise in an open economy. The root of the confusion lies in the prevalent naïve-libertarian illusion that a transaction between two consenting adults, when devoid of coercion, is effectively just a transaction between two consenting adults and can be isolated and discussed as such, pairwise. One must consider the ensemble of transactions and the interactions between agents: people happen to engage in contractual agreements with others; for them a given transaction is just a piece. To be able to regularly buy goods denominated in bitcoin (that is, fixed in bitcoin, floating in U.S.$ or some other fiat currency), one must have an income that is fixed in bitcoin. Such an income must come
from somewhere, say, an employer. For an employer to pay a salary fixed in bitcoin, she or he must be getting revenues fixed in bitcoin. Furthermore, for the vendor to offer a can of beer in fixed bitcoins, she or he must be paying for the raw material, and have the overhead fixed in bitcoin. The same with a mismatch of assets and obligations on a balance sheet. All this requires a parity bitcoin-USD of low enough volatility to be tolerable and for variations to remain inconsequential.

There are also arbitrage bounds present in any sufficiently efficient economy with relatively free markets.

Furthermore, if a vendor prices goods in bitcoin, and the value fluctuates from the initial fixing, the price will be directly or indirectly arbitraged: when the conversion rate to fiat is favorable, customers will buy from the bitcoiner; when unfavorable they will either buy elsewhere (indirect arbitrage), or if possible, return previous goods (direct arbitrage). For the price to not be arbitrageable requires the good to be unique and unavailable elsewhere at a fixed price in another currency –in this case it becomes, simply, a proxy to bitcoin. The only items that currently appear to be somewhat priced in bitcoin are other cryptocurrencies, even then.

Taleb does not invoke the MMT/chartalist view that the acceptance of a currency depends on the necessity of acquiring it to make tax payments. But he gets to similar place:

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.

Taleb, as did Roubini, calls out the fiction that Bitcoin is somehow democratic:

One would have the illusion that, by being distributed, Bitcoin would be democratic and reduce the agency problem perceived to be present among civil servants and banks. 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 cumulativelyearning 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.

If you get as much of a charge as I do from getting ideologues wound up, I hope you’ll send this article on to your Bitcoin true believers and watch them go on tilt.

00 Bitcoin_Currencies_and_Bubbles
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    1. Susan the other

      me too. Who says Taleb doesn’t have a wicked sense of humor? The Fallacies are veritable sitcoms. I’d really like to see the one about the diehard libertarian getting frustrated with all the rules.

      1. John Merryman.

        It seems like the only things that the government tries to suppress the cost of are silver, gold and food. Everything else just soaks up the surplus investment money.

    2. Nathan Alexander

      I agree with much of what Taleb said in this paper. The most important thing is that BTC and other crypto”currencies” are actually NOT current, meaning goods and service are fixed in fiat currency, floating in cryptocurrency.

      One thing though, as awful as cryptocurrencies are. Are they really much worse than fiat currencies? I only use USD because that’s what I can get paid in from employers and it’s current for my expenses. But I’d really like a better currency than USD.

  1. .Tom

    The paragraphs you excerpted staring with “To many paranoid antigovernment individuals and others distrustful of institutions, bitcoin has been marketed as safe haven…” remind me of antigovernment individuals who see the 2nd amendment as a hedge against an intrusive government.

    1. Tom Stone

      Tom, the 2nd Amendment simply raises the cost of Death Squads.
      Ever watch “Birth of a Nation”?
      Those dudes dancing around a burning cross did so because they had no fear of retaliation.
      Three persons armed with Winchester Model 1892’s could have turned those assholes into colanders, Which didn’t happen because the South had sensible gun laws that coincidentally disarmed poor whites and minorities.
      Like California does, and like Mexico does to a much greater extent.

      We are Human, there is no good answer.

      1. Darius

        Right wing violence is tolerated and even tacitly condoned. The right is another arm of the neoliberal state. Left wing violence is harshly suppressed. The Second Amendment bolsters state power against actual popular uprising.

  2. Thuto

    I can already picture Michael Saylor spilling copious digital ink writing a “rebuttal”. Since the bitcoiners have de facto excommunicated Musk, he’s taken on the mantle of Chief Hype Officer for the cryptocurrency. He let slip during his gold vs crypto debate with Frank Giustra (well worth a watch I might add) that Micro Strategies has borrowed $1.7billion to sink into bitcoin, so he’s more or less bet the company on it and with bitcoin continuing to plummet, the loan is probably “under water”.

  3. agnostic

    “It is a wealth transfer to the cartel of early bitcoin adopters.” I’ve been saying that for years — “Okay, okay, I’ll climb on board and help your alternative currency get normalized, and make you a billionaire in the process, so that … so that…. So that what again?” How is a bunch of power-hungry bros with lasers in their eyes controlling my life better than the current plutocracy?

    1. milesc

      So that people have a bona fide global, non-state money. Freedom money. I think it’s fine if you don’t want or need it, but it’s happening! I for one commend all the people who invested time, money and effort to making it work. It’s pretty amazing that it has come this far, all things considered. That it will continue its march to become a global, non-state money, open to everyone? Incredible, and a positive development for humanity.

  4. The Rev Kev

    ‘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.’

    Why am I reminded of a pyramid scheme?

      1. Dirk77

        I was writing the same question to agnostic above till I noticed Rev Kev’s post. So thank you.

    1. KiWeTO

      Wny not look at it as a Multi-level marketing style scheme? Slightly more ‘legal’ than a pyramid, but mechanically similar. The more zealous converts, the more value of my bitcoin.

  5. Dan

    While some of the points surrounding bitcoin aren’t off base TODAY, I think this is going to be one of the many takes that won’t age well. So many people look at the weaknesses of bitcoin alone but not the full crypto ecosystem. They look at the morons on Twitter that do talk like Ponzi scheme participants but don’t talk to the engineers that are enthusiastically building solutions on the next version of this tech (improving scale, expanding use cases, and building off strengths like greater access, security, and privacy).

    So much of the criticism components here could be leveled at early adoption of any early stage technology (and was). Remember, PCs took two decades to achieve any level of utility for the average consumer. Ditto for the internet. Ditto for mobile. A lot of these complaints are very status quo and ignores the potential future use cases and what is actually being worked on behind the scenes. Look into what Ethereum or Chainlink or IOTA or Uniswap enables. These and other strong projects provide highly significant use cases as those technologies mature and gain more mainstream adoption. Like any new system-level technology, it’s hard work and we don’t just wave the magic wand and have next-level technology with mass adoption overnight.

    It’s also very US and developed economy centric and ignores the benefits from a digital-centric financial system that provides immediate access in places that are underserved or have corrupt financial systems and governments. I always encourage thinking about bitcoin as a first product (that can be improved upon, definitely) that initially provides value in a place like rural India or Venezuela or in other developing countries that lack financial infrastructure. Just because people that have strong banking systems don’t see any use case doesn’t mean that the bigger population that has awful banking systems doesn’t.

    Looking at Bitcoin alone and looking at bitcoin through the lens of what it is today versus what some very talented people are working on for tomorrow is weak. Yes, many of the crypto people are cringe-worthy cult-like trolls. But there’s a big reason that some of the smartest engineers, bankers, and VC investors are pursuing this so strongly (mostly behind the scenes). There’s a lot beneath the surface and a lot still to come in this space. The hit pieces like this are going to look like the people that wrote similar pieces about how dumb AOL was in 1997.

    I doubt a “future potential” argument is convincing to anyone. But I’d also encourage people to keep a more open mind about crypto rather than immediately casting off something that is in development because you don’t like the people or the version 1.

    1. voteforno6

      The use cases for crypto are what, exactly? How does using crypto, which is very prone to abuse by scammers, benefit people who live in areas with corrupt financial systems?

      So far, crypto doesn’t seem all that different from tulip bulbs, except without the tulip bulb part.

      1. Dan

        Use cases – I could write a book about what’s coming but summarizing it without writing a novel… there will be insurance and banking products that aren’t possible or financially feasible today, censor resistance across various industries (since I know many people will think is bad from a US centric lens, think about China or Russia censorship resistance in finance, social credit systems, comms, etc), smart contracts that provide code based enforcement when that’s a value-add feature, digitizing assets and records (an example being mortgage titles but so many more), providing instant and cost-free remittance, micropayments, creating verifiable identity programs, enabling new levels of governance capability across communities… the list goes on. Much of this is being worked on. It’s a very challenging problem to solve.

        Scammers, not sure I see your point. Scammers use every form of exchange – cash, financial system, and yes crypto. Ignore the media… they are sensationalizing this from a crypto standpoint. It’s staggering how little they understand this stuff. Can people be scammed, yes. Is there something unique about crypto that makes scams more likely, not really aside from the immaturity of the industry to solve the commons ones.

        How does it benefit people in corrupt financial systems? Look up the stats on how many are under or non-banked. Look into how in many countries, banks historically steal deposits or impose authoritarian capital controls. Look into highly unstable currencies and why this happens… usually government corruption or incompetence. Bitcoin looks speculative from the standpoint of those in secure banking systems. But the use cases in our early days are in things like remittance, gaining access to banking, and having a currency that is more reliable than historical. By the way I don’t think bitcoin wins the day. There are better ones emerging that provide better ways for this to happen. Bitcoin is like Netscape… more versions ahead.

        1. Stephen Gardner

          Okay, could you sketch out for us some of these future banking and insurance products that depend on Cryptocurrency to work? What is it about cryptocurrency that makes these future insurance and banking products possible?

          I think when people ask for use cases they want something a little more concrete.

          1. Mikel

            “Banking and insurance products”
            Whether paper pushing or digit pushing, it sounds like more double-dip BS to me.

            The never-ending crapification of everything thru over-financialization…

        2. vlade

          You haven’t provided a single one in detail, despite saying you could write a book.

          Distributed public ledger doesn’t provide any privacy.

          Smart contracts are bad for anything non-trivial. Just ask SPVs that tried to run company by contract.

          All the other ones don’t need trust-less distributed public ledger, we have technologies that work just as well, and non of them solve problems of input-into-system, aka crap-in-crap-out. In fact, by making the transactions unrollbackable, you make it worse.

          I’ve been looking at this for ages, and did not find a single UC that would not be achievable with other technologies just as well, and in many cases the underlying assumptions for BC UCs were just bonkers (usually totally ignoring that the real world is NOT digital and there will be ALWAYS human-machine interface).

          Merkle trees are 40 odd years old technology, which have its place, and have been used around. BTC/Block-chain in 10+ years of existence failed to produce any real world one except enabling massive pyramid schemes. The BC revolution is so far a no-show.

          All BC startups I talked to admitted, sooner or later, that the BC was there only as investor sugar candy, and often their core technology avoided BC, or used it only on non-critical bits.

      2. Mike

        I’m wondering if crypto could improve on the serious flaws of the eurodollar reserve currency system…

    2. lyman alpha blob

      You think bitcoin will be used by rural Indians and Venezuelans? My guess is people like that will opt for using liquor as a store of value, as early rural USians did when the new US dollar was too volatile, way before they start using the tools of silicon valley [family blog]ers.

      You let me know when I can buy a bag of chips with bitcoin and have it take less than two weeks. In the meantime, maybe you could let the rest of us know where you purchased whatever it is you’ve been smoking. Sounds like good stuff.

      Off to buy some lunch. With cash.

      1. Jre1345

        Privilege at its finest on display here! It’s already being used by people in the least developed parts of the world. Get out, talk to them. Love the snarky ones that think they know everything and then make a fool of themselves because they read their partisan news and think they know the world outside of their privilege bubble.

      2. da

        It’s already being used in places like that. Sorry, it’s helping those people quite a bit.

        1. Yves Smith Post author

          No, they and you are fools. You and they don’t understand the total cost because the foreign exchange cost of swapping in and out of crypto is opaque to them. The low remittance fees mask hidden bid-asked spreads. You are pumping for making crypto-middlemen a very nice turn at poor people’s expense. Nicely done.

          1. milesc

            Yves, they are using it and they know full well the costs. It has proven (to them) to be a better and cheaper alternative to the status quo. Otherwise they would not use it. So I am not sure why you would call them fools.

    3. Kramer

      The computer and the other technologies mentioned may not have been useful to the average person for a while, but they were very useful to many people almost from day one.

      Also, government currencies are an extension of democracy. Since most governments are at least somewhat democratic, crypto fans wanting to end government’s ability deficit spend or enforce laws seems profoundly undemocratic.

    4. diptherio

      Dude, how long is this development cycle? ‘Cause this stuff has been around for a minute.

      “…there’s a big reason that some of the smartest engineers, bankers, and VC investors are pursuing this so strongly…”

      Ever heard of a little company called Theranos? How about Uber?

    5. Jon Sellers

      I’ll agree that the blockchain has some good use cases. I haven’t yet found any though that don’t already have far better and cheaper solutions.

    6. Frank Little

      It’s also very US and developed economy centric and ignores the benefits from a digital-centric financial system that provides immediate access in places that are underserved or have corrupt financial systems and governments.

      If a country’s financial and governmental system are so lacking that traditional banking and financial services are not adequate, does it really follow that their internet infrastructure will be able to handle widespread near-term adoption of cryptocurrencies? My own limited experience travelling to places like Haiti or Peru suggests that it would be difficult for anybody outside of major urban centers to use even a faster and more efficient cryptocurrency on a daily basis, certainly not immediately. In a way it reminds me of the people pushing widespread adoption of self-driving cars because of successful testing in some specific urban areas when the sorry state of car infrastructure in the US is by now well-documented.

      Invoking people underserved by the current global financial system just does not seem very persuasive to me, especially if the idea is that it’s of more immediate value to them than to the people making money by pure speculation or using it to try and avoid taxes or launder money. This is not to say that nobody in these countries could use the technology right away, but I would guess that the same people who could are also among the better connected to the existing financial system as well.

      As you say, these factors may change, so I am not trying to be polemical, but this argument in favor of cryptocurrencies strikes me as more of a post-hoc justification than an immediate use case.

    7. Bobbo

      I wholeheartedly agree that Taleb’s criticism is a bit premature. It made me flashback to 1996 when the Nasdaq suffered a correction of about 30% after a runup. There was lots of talk about tech stocks being too volatile. Lots of people questioning the talk about a new economy. The internet had been around for years by then, though the older generation was still slow to start using internet and the WWW. I got my first job back then, and was debating whether to invest in tech stocks — Yahoo in particular. I decided against it, thinking that the internet craze had already passed, and that I had missed my opportunity. We know how that turned out.

      I know that the community here is generally opposed to crypto, but I wonder if that sentiment is uniform across generations. I suspect that the older than 50 crowd feels stronger than the under 30 crowd. In my view, having learned my lesson in 1996, I am hesitant to dismiss bitcoin because I really cannot see the future. This might still be the first inning. Bitcoin might yet become the world’s premier reserve asset, particularly if sovereign bond yields sink deep into negative territory.

      In my view, the only wrong bitcoin allocation is 0. But what do I know?

      1. vlade

        Nasdaq never had a 30% correction in 96. It had a large drop in 1990 and another, smaller in 1998, but other than that it had at most ~10% drops. The company that survived the .BOMB in 2000 were companies which actually had product and cashlow. BTC doesn’t have any product except for BTC. Every single time I ask for a UC, I get vague hand-waving with “there’s so many, I don’t know where to start”.

        BTC is the fiatests of the fiats. It’s only value is the social consensus on its value. The governments, if they chose, could kill BTC overnight. China is already pushing it out, and if US/EU did the same, BTC would be dead (if for nothing else because there’s few other parts of the world which can provide the cheap energy to run the mining).

        If you wish to speculate on BTC, your call. As a long-term “asset”, it’s value is IMO zero.

        1. milesc

          Bitcoin use case: global, non-state, programmable money. I don’t know why no one told you that.

          The market is currently trying to price it, including taking into account the types of scenarios you imagine. How do you price a fledgling global, non-state, programmable money with its own built-in payment rails and accounting system? I don’t know, but I fully expect it to be a rough ride for the foreseeable future.

          What I do know is that governments can’t “kill BTC overnight” (unless by “kill” you mean significantly dent the price?) and that Bitcoin will survive just fine without China, the US and Europe. It is way more resilient than that, and absolutely not dependent on an unlimited supply of cheap power (though miners will seek it out if it is available). I don’t know why you think otherwise.

          1. IMOR

            When assertions are repeated so sunnily as though they were arguments or reasons, I know I’m dealing with belief and faith, not facts or logic.
            However, as I’ve aged, I’ve had to steadily recalibrate my opinion of the power of faith in people’s minds and lives.
            I think the power demands will prove a subsidized rug the pulling out from under which actually will evict BTC from 90% of thd world, but what better marriage than hopeful true believers with “the fiatest of the fiat”? (‘Survival of the fiatest’. Sorry!)

              1. Bobbo

                The use case is to have a place to park funds electronically, outside the dollar system, as an alternative to sovereign bonds (many of which are already in negative territory, and many more of which will be in negative territory in the next major downturn), with no need to take physical possession in a physical vault.

                That’s the use case that has been put forward. What else are you asking for? Are you asking for people to convince you about the use case? It seems that your mind is made up, and that would be a waste of time.

                I do not know who is right and who is wrong, but I see this as an asymmetrical proposition. Game theory tells me that it makes sense to have some skin in the game, even if it’s only lunch money.

                1. vlade

                  I assume you mean “outside of government-fiat system”.

                  People have been doing that by stockpiling gold. Or land. Or guns and ammo.

                  There’s zero need for BTC to do that, especially since BTC is tied to no real assets at all, and is, despite all the propaganda, totally dependend on governments ignoring it. Govts can criminalise BTC pretty damn quick, if they chose to do so.

                  Also, BTC is _extremely_ reliable on world stability, because it needs stable internet and electricity supply. In a chaos-like situation, it’s less useful than a bricked laptop.

                  It is a South-Sea bubble w/o their quality business plan.

            1. milesc

              “I think the power demands will prove a subsidized rug…”

              Perfectly reasonable to speculate that this might one day be the case, but have you looked in any detail at all at Bitcoin’s power demands and how it might adapt to changes in hashrate? You can watch in real-time: China is forcing miners out of the country _today_, with enormous amounts of hashrate dropping offline. Any other network would be crippled by an equivalent hit to its core infrastructure. Yet Bitcoin has barely noticed. Blocks continue to be added to the blockchain. More to the point, Bitcoin would chug along just fine even if the power supply were massively reduced and permanently limited. It adjusts, literally; the adjustment mechanism is in the code for all to see.

              I also think the power consumption concerns are massively overblown (not surprisingly!). It is a lazy take by people with preconceived ideas about its usefulness — people who happily ignore that tumble dryers in the US alone collectively use way more power than the entire Bitcoin network, and that Bitcoin’s overall energy mix (in terms of CO2 emissions) is already much better than the average. Oddly, it is Bitcoin’s transparency that makes it an easy target for bad takes.

    8. Jason

      Sink bitcoin first because it is obviously not going to work out. If the others are fundamentally workable they’ll survive the negative hype.

  6. DJG, Reality Czar

    It was hard for me to pass up this observation by Taleb: ‘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”.’

    It isn’t much of a stretch to point out that Amazon, Uber, and Lyft are in the same category: They are useless because they are redundant distribution systems relying on predatory pricing to exist.

    So: Question. If bitcoin and blockchains have to go, what about those three corporations? [Which are only the most obvious of many, including such less visible monstrosities as GrubHub and Ticketmaster. All of which are pretty much just taxes on time and on the distribution system.]

    1. Skip Intro

      The similarity with Uber struck me too, but in the sense of being a bubble driven by very skillful manipulation of a sort of technophilia that assumes all disruptions are useful and bound for success. Imagine Juiceroo but with 9 billion of the dumbest money on the planet to throw at the press and influencers. Bitcoin is wonderfully manipulated via influencers. I wonder how much Elon made of his little BTC pirouette. And when they are reminded that they have no path to a currency or profitability, someone waves a shiny new thing, like a self-driving car or a major trading desk buying a bitcoin, and the courtiers and twits swoon.

    2. jsn

      How long does it take a parasite to kill its host? We have a whole cadre of parasitic innovations scouring the carcass of western civilization and a set of captured public institutions now dedicated to sustaining the Ponzi, feeding the parasites directly where there’s no flesh left on the bone.

      Money itself is a public trust the cryptonuts are trying to engineer a way around, but none of it works without trust from the public which will end when it ends. As do all irrational bubbles. The only thing really new here, and for all I know China delt with this several thousand years ago, is that the Ponzi scheme is backed by fiat with issuing Central Banks self-consciously funding the Ponzi.

      So, it won’t be what we normally think of as a “financial” shock that blows it all up, rather something political that defines an end of belief.

      1. Darius

        Money is a public trust. I would add money is a core function of the state. “Congress shall have the power to coin money…” When Congress surrenders that authority to a bunch of swashbuckling crooks answerable to no one, you will know society is truly debased. Privatized money is the apotheosis of neoliberalism.

        1. Societal Illusions

          who is it that owns the federal reserve? oh wait… or maybe that is your point?

          1. jsn

            While private banks are required to own shares (as I understand it) in the Federal Reserve, the Federal Reserve is an entity of the US Government. Nominally it is the issuer of money and a regulator of the banks it licenses but it’s close association with the major private banks has it frequently operating in their interest rather than the publics.

            Effective public leadership can change that in a moment. This is why finance pays generously to both parties: to prevent public leadership.

            To Darius point, the private swashbucklers will never be able to manage the public trust issue adequately to compete with a China that, whatever its problems, has no illusions it can be a great nation by crushing its population, the underlying trope of neoliberalism.

    3. vlade

      I disagree about Amazon. Amazon actually has products that it could (and does) sell. That it has predatory practices is another issue, but it’d likely survive even w/o those (for example cloud is ok for some applications, in which case AWS is a genuinely good product).

      Uber and Lyft would not.

  7. Skip Intro

    At this point, bitcoin cultists cannot be swayed by facts or logic, they have build an identity around it, and arguments to the contrary just affirm their beliefs and deepen their sense persecution. That doesn’t mean it isn’t fun sometimes to crash busses into their cognitive dissonance and watch the fireball… from a safe distance.

  8. KD

    Crypto remains an excellent vehicle for bribery, money laundering, trafficking goods/people and tax evasion. The latter are in a strong bull market with improving fundamentals.

    1. Thomas P

      Since every transcation is stored in the blockchain, crypto currencies aren’t that good for crimes now that the police has started to catch up. It worked when this was something obscure that law enforcement knew nothing about, but today it’s a lot harder to use the currency without leaving clues to your real identity.

  9. Grant

    I was debating cryptocurrencies with Bitcoin proponents (from what I can tell, investors that want to see financialization spread more). Many of them have ideological objections to fiat currencies and claim that cryptocurrencies will replace them.

    So, I asked some questions.

    1. If you do away with one unit of account, what complexities are you introducing into the lives of working people? What happens if there is no one unit of account? Buying something as simple as a loaf of bread becomes a complex headache. Just because these people can operate in that world, that doesn’t mean working people could or would want to.

    2. How do you pay taxes?

    3. Why would states accept currencies that they don’t create?

    4. For that matter, are cryptocurrencies actual currencies?

    5. We need comprehensive economic planning to deal with the environmental crisis. How could be possibly effectively plan if we got rid of national currencies all together?

    6. Why not just democratize money creation and banking itself? Why not deal with the capacity of banks to create money?

    From what I can tell, the crypto crowd are just libertarian ideologues that don’t care about how such a thing is totally unworkable, or they are investors that want something they own to appreciate in value. Some are both. The more they can convince someone to invest in that thing, the more the value appreciates.

  10. a different chris

    Ok going off on a completely, it’s hard to even call it a tangent, from this article:

    >By comparison, the mafia required a Sicilian lineage for “friends of ours”

    So *that’s* why a relative who had moved there discovered that Sicily was simply a great place for a foreigner to not only visit but live. Neither he, or we as visitors knew why, but boy it was true. He said “you can have two top-quality Sicilian friends who you simply cannot hang out with at the same time. And it’s not that they dislike each other in some huffy American way, it’s seriously dangerous. Yet you adore both of them.”

    You are “marked” in the best way possible, as it is impossible for you to be involved.

    Funny what you can learn from Taleb!

    PS: we also managed to show up pretty much the only time in recorded history when there was no visible lava on the volcano. Just a few sad puffs of steam. Sigh.

  11. J.

    Bitcoin/Cryptocurrency is trash. So is the USD. Put your faith in the American government, or in 1s and 0s, but stop behaving as if the current system is “backed” by anything besides assured death and misery (for the other guy).

    Taleb waxes technocratic about ‘inherent value’ then goes on to describe the negligible utility of the other things we have elevated (well beyond their worth), to justify the mass delusion that is any monetary system.

    With all the abstractions and obvious perversions of value that have facilitated the status quo, how can any economist/finance type say with a straight face “no, there’s nothing backing that one, it’s a Ponzi scheme”… then go back to leverage trading, derivatives, fractional reserve banking, etc.?

    That Bitcoin has no inherent value, is it’s most endearing feature. It is the same idea that enables the written word; the alphabet. The symbols we use to communicate sounds mean nothing inherently. An ‘A’ could mean ‘tent’, pictographically, but then we would have a picture for every concept! Instead we assign it a value: a sound we string together with others to communicate… but in order for that symbol to receive a sound value, it must first be inherently meaningless (Chomsky et al), just like cryptocurrencies are inherently valueless!

    Right now we are communicating (trading) with pictographs (currencies) whose meanings (values) are (supposedly) wedded to useful things like “tents” (oil, gold, etc). Cryptocurrencies are entirely divorced from such limitations, and can be viewed as a financial alphabet: symbols which represent value itself (sounds in language) versus the incumbents’ hieroglyphics which only represent assets (increasingly loosely, mind you).

    That we are not yet literate is to be expected. That we are threatened, is a given.

    1. CenterOfGravity

      This post wins today’s Diogenes award. No one wants to hear that every aspect of human civilization is idiosyncratic fabricated rubbish. And yet… here we are.

    1. KiWeTO

      Your vote cannot be secret if it’s on the public ledger for all “perpetuity”.

      That kinda defects the core tenet of each anonymous vote in a democracy?

  12. R

    Two observations:
    – the Isle of Man is not a secrecy jurisdiction. It is a tax haven but a very regulated one, compared to Panama etc. The government knows exactly what you are doing in the IoM so it’s not better than Bitcoin.

    – Bitcoin would be a disaster for criminals because an immutable blockchain is a gift to the equitable doctrine of tracing. This is the collection of rules by which the court can order restitution of the proceeds of a tort or breach of fiduciary duty. Money launderers layer money into the financial system and reintegrate it in order to defeat criminal laws on the proceeds of crime but they also do this to defeat civil laws that would otherwise enable the assets to be recovered.

    Tracing has a problem when goods are fungible – I seem to remember a case about wine bottles frustrating tracing because the ownership could not be demonstrated whereas gold bullion is numbered and could be traced. It also has a problem when money is commingled with legitimate money, in bank accounts or when something is sold/purchased at arm’s length for value (to prevent tracing claims from tainting and jamming up the entire economy).

    However, Bitcoin is not fungible, each token is uniquely identifiable, and not commingled, so it is the very definition of traceable….

    1. vlade

      When courts starts asking for restitutions, or laundered-funds stuff, I believe we’re going to see some very unhappy BitCoiners. And the fun we’d have if they pledged it as a collateral..

  13. Adam Eran

    First of all blockchain is a distributed database. These have been around for a long time, and might be a new name, but don’t appear (to me) to be a new technology. Any carrier-grade database installation typically has a failover database on standby in case the primary fails. Blockchain backs up the database to several locations. Big deal.

    Bitcoin (AKA “litigation futures” — Yves) itself takes its impetus from an understandable wish to have value independent of a trusted third party (typically the state). David Graeber reminds us that historically there have never been economic markets without states to initiate, guide and regulate them. Never!

    Yet the myth of the independent origin of money (Robinson Crusoe and Friday barter, then use seashells as “coins”) persists. The truth is that the Mesopotamian origin of monetary score keeping never included barter, and arose simultaneously with state actors.

    I’m glad to see Taleb isn’t a bitcoin fan, but have seen him lecture scolding those present to consider national ‘debt’ a threat to resilience. So…MMT…not much.

    1. Yves Smith Post author

      I insinuated Taleb is not on board with MMT but came to MMT-like conclusions in this context.

      It is very hard for finance-trained people to understand that a fiat currency issuer is not a business. Took me some time to get over it. You’ll see conventional wrong-thinking in my early posts.

  14. Mike Furlan

    Also Taleb:

    “[Bitcoin’s] 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 wrote in 2018.”

    Let’s check back in with him in a couple of years.

    1. milesc

      Indeed. Taleb was pro-Bitcoin for years… until he had a public bust up with Saifedean Ammous, author of The Bitcoin Standard — a book that Taleb wrote the Forward for!

      “[Bitcoin] 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.” – Taleb

      The arguments spiralled and seem to have cause Taleb to drastically change his views on Bitcoin, and here we are.

      1. jsn

        Taleb wrote in Antifragile that he entered his understanding of economics through a Hayakian portal, idealistic and very abstract.

        Personal experience of the Lebanese Civil War protects him from projecting beautiful abstractions too neatly onto reality.

        The break you describe exhibits his persistant reality bias.

    1. Thomas P

      Unfortunately, you won’t know if you were early until afterwards. Some pyramid schemes fizzle out almost immediately, others keep going for years.

  15. Henry

    Taleb is brilliant, but it seems there is more to this story than just blockchain technology. I don’t really have any interest into researching the personal details around the conflict. I will however provide a link to 30 current Blockchain Applications for anyone that may be interested in what the technology can do at the moment:
    That is not to say this technology won’t have challenges getting adopted, for example El Salvador is hoping to save its citizens billions annually in remittance fees by switching over to crypto, but I doubt the established players are going to make that transition easy.

    1. Yves Smith Post author

      El Salvador’s view of crypto costs is very poorly informed.

      The volatility cost of exchanging from crypto to a real currency will swamp the savings in remittance fees. They’ve been pwned.

      1. milesc

        Yves, El Salvador’s adoption of bitcoin was inspired by the positive transformation of El Zonte and surrounding areas by the success of the Bitcoin Beach project (bitcoinbeach dot com/#about).

        They have been using bitcoin for over two years. Despite the volatility. They are better informed than most.

    2. vlade

      I’ll really like to see how will Salvador deal with BTC being legal tender, which means that ANYONE must accept it to settle a monetary debt. I’d really love to hear how a street seller in Arambala is going to accept a trivial fraction of BTC for what he sells and then use it to pay the farmer he buys the produce from.

      Secure sharing of medical data
      – ugh? 1) CICO applies. 2) secure as in? 3) how does it differ from strongly audited-write-once DB with hashes on updates? (hashes != BC).
      NFT marketplaces
      – circular argument
      Music royalties tracking
      – because we weren’t doing that before..
      Cross-border payments
      – because we weren’t doing that well enough before. Why is it better?
      Real-time IoT operating systems
      – Ugh? Nonsensical w/o going into more detail
      Personal identity security
      – Doesn’t mean anything w/o much more detail
      Anti-money laundering tracking system
      – CICO. How does BC tell you what is or isn’t being laundered? Irrelevant.
      Supply chain and logistics monitoring
      – CICO. Which is the main problem in these types of UC. So you need plenty of rollbacks. What’s the plus?
      Voting mechanism
      – Electronic voting???
      Advertising insights
      – because???
      Original content creation
      – Ah, nothing original was ever created before BC.
      Cryptocurrency exchange
      – circular argument
      Real estate processing platform
      – because we never sold RE until BC existed. What’s the advantage over existing systems?

      2x circular argument
      4x way too vague handwaving
      1x totally spurious (electronic voting)
      3x not solving CICO problem at all
      8x doesn’t explain how it’s better

      And yes, I read the descriptions below, but they say dumb things (investor sugar) like these:

      ‘Blockchain-infused IoT adds a higher level of security to prevent data breaches by utilizing transparency and virtual incorruptibility of the technology to keep things “smart.” ‘
      “prevent data breaches”
      “virtual incorruptibility”

      “By taking passwords off a centralized server, while using biometric and password-free solutions, the company makes IoT devices virtually unhackable.”
      And how exactly does it need BC?

      I could go on, but won’t I have better things to do.

  16. Ook

    Plus, just from a technical viewpoint, it is such a strange idea. The quote below is pulled from a discussion board of sysadmins that I follow:

    “I have an idea for a data structure, hear me out.
    A linked list where every node contains a hash of all the data in the nodes behind it, and every time you want to add a new node, you need about 200,000 other computers to say ok and consume the power equivalent of a small nation”

    1. vlade

      Actually, the first part (hash of hashes) has been around for quite a while – Merkel trees. And it’s useful in some applications (and has been used for quite some time).

      The voting pattern is also useful in some applications, again, not new and has been used.

      The reason for energy consumption is that it relies on Proof-of-work. Which is an idea dumb beyond recognition. The only reason why it exists in BTC is to distribute the initial 21m coins in some way, and make people work for them (as oppose to say allocate them randomly). Once the coins are allocated, you don’t really need it, in fact, it becomes impedance, as you want to verify the transactions as fast as you can, and the fastest verifier should get rewarded (well, there’s a thing that in theory the fastest verifier might cheat, while with Proof-of-work in theory there’s no such thing as fastest verifier or rather it’s more random, but there are ways of dealing with it).

      So some of the technical parts are good – but they certainly aint’ novel. The novel is the application, which really is a total misunderstanding on why financial stuff operates the way it does (and did for a loong time. For a reason, usually a good reason.).

      1. milesc

        “The only reason why it exists in BTC is to distribute the initial 21m coins in some way”

        That’s not the only reason.

        Proof or Work enables anyone – even you! – to fire up a node, join the network and determine the correct version of the truth (i.e. the order of transactions to date) _without needing to trust anyone at all_. This is crucially important: your node will acquire and verify everything. You could be connected to 100 bad actor nodes, all trying to deceive you, but a connection to just one honest node is enough to determine consensus (by verifying the proofs of work!). Quite remarkable, really.

        PoW also enables anyone to participate (in the mining process), with no gatekeepers. People can come and go as they please.

        PoW also protects against subsequent changes to the ledger, and it is cumulative(!), meaning it is exponentially more difficult to undo a transaction with every passing block, effectively achieving finality. Another remarkable achievement.

  17. Skyburn

    “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.”

    This reminds me of Maxim 33: If you’re leaving tracks, you’re being followed.

  18. Wukchumni

    Could the various cryptomid schemes go similar to Albania’s pyramid schemes of 25 years ago?

    The pyramid scheme phenomenon in Albania is important because its scale relative to the size of the economy was unprecedented, and because the political and social consequences of the collapse of the pyramid schemes were profound. At their peak, the nominal value of the pyramid schemes’ liabilities amounted to almost half of the country’s GDP. Many Albanians—about two-thirds of the population—invested in them. When the schemes collapsed, there was uncontained rioting, the government fell, and the country descended into anarchy and a near civil war in which some 2,000 people were killed. Albania’s experience has significant implications for other countries in which conditions are similar to those that led to the schemes’ rise in Albania, and others can learn from the way the Albanian authorities handled—and mishandled—the crisis.

    The wide appeal of Albania’s schemes can be attributed to several factors, including Albanians’ unfamiliarity with financial markets; the deficiencies of the country’s formal financial system, which encouraged the development of an informal market and, within this market, of the pyramid schemes; and failures of governance.

  19. Ralph

    Long time reader and my first post. Forgive me for any mistakes.

    It seems to be the more crypto gets wrapped into the financial system the more it will get wrapped and tied into laws and regulation that govern and uphold the financial system, which is ironic.

    I don’t see how crypto will never not be volatile as well. (I see comments about exchange rates.) Plus, seems to be another scam from the developed world to the developing world, like micro-loans. “Money” that may be valuable enough to buy food today but valueless tomorrow. Plus, convince me that the developed world won’t find away to snatch up the crypto from the developing world again anyway, or that local elites in the developing world won’t try to find ways to hoard it as well or steal it from the poor and disadvantaged.

  20. eg

    Bitcoin is an electronic gambling token.

    And the crypto-honks seem to me to be about as financially sophisticated as the Underpants Gnomes …

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