May 25, 2021 - 10:42am
Earlier this year, Nassim Taleb — bestselling author of The Black Swan — announced he’d be selling his Bitcoin holdings.
Bitcoin enthusiasts weren’t best pleased. To have a legendary investor like Taleb turn against the cryptocurrency wasn’t the validation they were looking for. However, their irritation soon turned to schadenfreude as the value of Bitcoin against the US Dollar soared to record highs.
And then came this month’s spectacular crypto crash. More than a trillion dollars have been wiped off crypto values. Suddenly, Taleb’s decision to sell didn’t seem so foolish. But, now, a further twist: a surge on Monday that saw Bitcoin recover some of its losses.
So who is right about Bitcoin — Taleb or the true believers that he calls ‘Bitdiots’?
I’d be reluctant to bet against the former. After all, this is the guy who famously saw Global Financial Crisis of 2008 coming. He was also one of the first public figures to understand the seriousness of the Covid crisis.
Yet, despite his record, he’s not a forecaster, let alone a ‘super-forecaster’. His entire philosophy — whether it applies to investment, politics or life — is not about predicting events, but about how to live with the risks created by events that can’t be predicted by anyone.
Thus when he pulled back from Bitcoin, he wasn’t predicting an imminent crash — merely pointing out that if you want to shield yourself from the ruinous effects of extreme risk, then gambling everything on an asset with a track record of wild highs and lows isn’t exactly the best strategy.
Taleb also expressed his disappointment in what Bitcoin has become. He believes that a decentralised society is one that is less fragile to risk. The great hope for cryptocurrencies was that they’d allow the decentralisation of systems of transaction. But, so far, this has only happened to a limited extent. That’s not surprising: it’s hard to use a currency whose value fluctuates so much relative to the things you’d want to buy and sell with it.
Bitcoin’s most cocksure advocates insist that, over the long-term, this volatility doesn’t matter. The total number of Bitcoins that can ever be created (‘mined’) is limited by design. Governments, however, can print as much conventional money as they like, leaving national currencies prone to devaluation. Bitcoin, therefore, is presented as powerful hedge against inflation. So forget the crazy ups and downs of this month, just look at the appreciation of crypto against conventional currency over the last five or ten years.
Except that the long-term is irrelevant if you’re a highly leveraged (i.e. indebted) investor who purchased your Bitcoin earlier this year, only to see its value poleaxed earlier this month. Even if its value fully recovers in time, and perhaps rises to new heights, that’s not much comfort if you’ve been ruined in the meantime.
Before buying in, it’s also worth remembering that Bitcoin’s artificial scarcity is no guarantee of enduring value. If enough people lose interest, then it doesn’t matter whether there are 21 million Bitcoins or just 21 — they have no underlying value.
In theory, you could say the same about conventional currencies. But in practice, the US Dollar has the United States behind it, Sterling has the United Kingdom and the Euro has the European Union. So what does Bitcoin have?
There’s an awful lot of money riding on the answer.
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SubscribeHow is crypto any different from a number against your name inside a computer in a cashless society?
Crypto has value because people believe it has value. The more you can trade in crypto the higher the belief that it has value. The same can be said of cash. What happens when no-one has any faith in the (fiat) cash that they hold, hyper inflation. Only cash backed by gold, for example, will retain value in all circumstances. well as long as people put value on gold. Imagine if nobody wanted gold anymore then it’s price would drop.
All currency systems irrespective of the “token” is based on peoples belief in it’s value.
The current “crisis” looks manufactured. Apparently there was a massive dump of crypto last week by large conglomerates, which drops the price, people panic and then those that dumped buy back at a 40% discount!
China has its own crypto, so does Russia and the US fed is rumoured to have one. Crypto is here to stay and more businesses are using crypto as currency for services. The central banks are not happy about crypto because they have no control over it, well some of it. Bitcoin is not really private. I would not fall off my chair if the current fall and buy back was instigated by central banks in order for them to gain control of part of the crypto space. After all they want people to use their crypto on their terms with their monitoring of all trades!
I’m not interested in Bitcoin. It’s Monero and Pirate Chain for me.
Crypto supply is inelastic, and there is no balancing of supply and demand. As you pointed out, that makes it vulnerable to speculators.
Not dissimilar to gold, once central banks had stopped actually holding gold to back their currencies.
Perhaps the volatility of crypto currencies (as compared to historical volatility of gold) is just that there is so much more gold to go around. Also, a lot of small investors have seen the rapid rise of crypto currencies and blindly got on board, creating the present bubble.
The trick is, I think, to spot the bubble forming and get out early. Not a skill I have personally, so I just avoid speculative investments…
China has 2 cryptos. One for domestic use which the ledger is held by the bank of China, enabling full state surveillance of any money. The other is joint project with Thailand, essentially allowing the party elite to move their stolen gains out of the country untraceablely
You cannot pay your taxes in cryptos.
Individuals should buy or sell Bitcoin with the understanding that they are simply gambling. The game is to bet that the stream of bigger fools and greed will continue to flow, and to cash out before the market gets spooked and collapses. It’s a high risk punt in which most will either win big or lose big.
As Bitcoin is intrinsically worthless, the price could drop to zero. I suspect, however, that Bitcoin will hang around as an easy form of gambling for those looking to make a risky punt, but that its price will be whittled away over time as the cryptocurrency markets become increasingly diluted and people get wise to the game when the number of people getting stung accumulates.
The notion that Bitcoin is a store of wealth, “digital gold” or a hedge against inflation is complete nonsense. Like other forms of gambling, the golden rule is: don’t bet more than you can afford to lose.
For most recent “coin investors” the attraction is purely the fashionable meme investment that has hooked them in.
They are the “pumped” buyers who will soon change their minds every time Musk et al. decide to nudge the hype – then “dump” as soon as the majority of followers have been sucked in.
In every Casino someone will have a good night.
This then raises the old question. Do I buy real gold and silver ? It has been the only historically proven store of value. The gold to silver ratio is looking very distorted .
That aside my son has BTC but is holding as he thinks the fall is a concerted move to shake out the small investors. Who knows?
Gold and sliver have real world uses. Bitcoin is the tulip mania of the 21st century
Cement & building materials if you have the room as going up in price & you can always build yourself an ark if necessary.
It would be better to buy the S&P. It will also protect you against hyper inflation. S&P is backed by real future earnings of companies in it, whereas BTC is backed by dreams and hopes…
Two things that perpetuate the mirage of Bitcoin are the iconic illustration of a bitcoin (as though it had a physical existence) and the term “crypto” which sounds arcane and technical.
Blockchain, the underlying technology, is simply a ledger that anyone can verify – hence eliminating the middlemen (banks, exchanges). Anybody can look up “who” (identity obscured) owns what – by reviewing the ledger.
Bitcoin will soon become the MySpace, Yahoo or America On-Line of cryptocurrencies, as imitators dilute the market. Most of the big losses will be borne by small holders.
Is the billionaire Ray Dalio a Bitdiot or a cynical opportunist? I think billionaires need to keep their mouths shut about things they do not understand instead of making throw away comments (or talking their book) and misleading the gullible public.