Bitcoin's biggest critics: Taleb's Black Paper

• How Taleb went from Bitcoin fan to critic
• The Bitcoin Black Paper
• Is Bitcoin's implied value zero?
• Addressing the volatility argument

There is an idea around critical thinking that suggests you should have strong opinions but loosely held. Given how new a technology it is, taking that view with bitcoin and crypto in general is sensible, which means being open to opposing views. If we want to focus on Bitcoin’s most vocal critics a good place to start is someone who went from supporter to vocal critic - Nassim Nicholas Taleb.

Taleb - From Supporter To Critic

Nassim Nicholas Taleb is a celebrated author of a series of five books - collectively known as the Incerto - that look at decision making under uncertainty, and how we are prone to behavioural and psychological biases in measuring the true probability of future events or value of assets. 

The most famous is Black Swan (2007) described by the Sunday Times - a leading British newspaper - as one of the twelve most influential books since World War II.

Taleb was originally supportive of Bitcoin, and provided the introduction to one of the most respected books arguing a case for Bitcoin - The Bitcoin Standard by Saifedean Ammous.

Things, however, soured between the two when Taleb’s opinions of Bitcoin changed in March 2021. It appears he had done less research than would be expected of someone putting his name to a book on such a contentious subject, but made up for that in what he describes as his Bitcoin Black Paper.

The Bitcoin Black Paper

As is obvious from the title, Taleb's Bitcoin Black Paper sets out to demolish the arguments that Bitcoin can function as either money or a store of value. His analysis pulls no punches:

‘In its current version, in spite of the hype, bitcoin failed to satisfy the notion of "currency without government" (it proved to not even be a currency at all), can be neither a short nor long term store of value (its expected value is no higher than 0), cannot operate as a reliable inflation hedge, and, worst of all, does not constitute, not even remotely, a safe haven for one’s investments, a shield against government tyranny, or a tail protection vehicle for catastrophic episodes.’

Taleb is well known for being rather pompous and condescending, so we can try and simplify his arguments, but unfortunately cannot reference his Twitter feed as he has locked it, given the negative feedback from the Bitcoin community.

Bitcoin's implied value is zero

Bitcoin doesn’t generate revenue, like a company. Its value comes from the network that supports and maintains it, a key component of which are miners, who constantly expend energy to validate new transactions and get rewarded with new bitcoin. That reward is currently 6.25 BTC for every mined block, but it halves every 210,000 blocks - or roughly four years - until 21 million bitcoin are mined.

Taleb is suggesting that miners might simply stop supporting the network, especially when the block reward ends (around 2140). Without miners supporting it, bitcoin’s value could drop to zero. His assumption is that if bitcoin has no revenue and a theoretical future value of zero, it should be considered as having no value now.

He ignores the fees that miners receive for processing transactions alongside the Coinbase reward, which will rise exponentially if the network effect of usage continues. That is a big if, and the behaviour of miners after the 21 million hard cap is unknown, but that doesn't necessarily equate to zero value.

Equally, government money has the potential to go to zero. The chance of this happening is measured by credit default swaps, which essentially provide insurance about governments defaulting on the bond obligations. By Taleb's logic the existence of a credit default swap for the US Dollar, implying a small chance it could default, must also mean that its value is zero.

Bitcoin doesn't qualify as a store of value

He also thinks that its volatility is simply too great to make it a usable currency, or true store of value, because by definition, a store of value should retain its purchasing power into the future.

High transaction fees and slow confirmation times come in for attack, and he raises the now familiar difficulty of buying a coffee. That issue is, of course, well documented and most responses have highlighted the omission of any reference to the Lightning Network, designed specifically to address this problem, with almost instant settlement and very low fees.

Bitcoin - and distributed ledger technology in general - has limitations. They’re detailed on Learn Crypto and beyond, in great detail, but those problems don’t mean the idea should be abandoned entirely. They are simply inspiring innovation and alternative approaches, as happens with the introduction of any entirely new concept of idea.

Sour Grapes & Confirmation Bias

One of the biggest problems with Taleb’s criticism isn’t necessarily the detail, which can be disputed - as shown above - but that he seems to be guilty of one of the failures of reasoning he has spent so much time highlighting - Confirmation Bias.

Having fallen out with Ammous - who himself takes no prisoners with his defence of Bitcoin - and the wider crypto Twitter community, he seems to have decided to change sides, hastily writing a paper to support his new position. 

If we were assessing the value of Bitcoin in a court of law, with Taleb as a witness for the prosecution, the defence would attempt to discredit him, based on both the ease with which he’s changed sides and the speed with which he developed such an intricate theory debunking something he previously supported. They would also throw in several other offences given Taleb seems to have several ongoing feuds at any one time, as if confrontation was his preferred hobby.

You could just argue that Taleb is just following the doctrine of a loosely held opinion? The only place Bitcoin is being debated right now is, of course, the court of public opinion, giving every critical thinker the chance to weigh up the arguments Taleb raises in his Black Paper. We've done that within the Learn Crypto blog examining the case against Bitcoin.

From a purely objective point of view, the idea that bitcoin should be valued at zero, because it may theoretically have a future value of nothing, can easily refuted by checking the current price.

A more meaningful rebuttal, however, might focus on the success of Bitcoin in functioning as a permissionless and censorship resistant monetary system with no central authority, that for twelve years has experienced no downtime or fraudulent transactions. Ask yourself if that has zero value?