Nassim Taleb on Bitcoin

Counterpoints

Nassim Taleb recently tweeted about Bitcoin. He asked how bitcoin could be a hedge against inflation if it “went up 1000% over a period when inflation was 1-3%”.

I don't think he's giving this his full attention.

His argument is essentially:

a) something is a hedge against inflation if it appreciates ONLY during inflationary periods

b) BTC appreciated during a period of minimal inflation

c) therefore, BTC is not a hedge against inflation

The “ONLY” in premise a) (above) is important because without it, Nassim’s formulation breaks down. Premise a) has to assume that an inflation hedge can’t rise for any reason other than inflation. But the rise in BTC is mostly explained by adoption: the market needs to get its hands on bitcoin for it to function and that adoption creates a demand all its own. Moreover, the market is adopting bitcoin for many reasons, not only as an inflation hedge, but also for protection from seizure, portability, ideological reasons (sovereignty, anarchy, rebellion), speculation, etc.

In a subsequent tweet Nassim argues that “something isn't an inflation hedge just because it's scarce”. But again, that's an oversimplification because BTC is not just scarce. The novel attribute of bitcoin is the coupling of scarcity and accessibility to anyone with an internet connection. Inflation hedges are typically fictions that we all count on each other to believe in in times of turmoil, like gold, silver, Swiss Francs, etc. We trust them to be safe havens because they have the strongest, most enduring myths. While bitcoin has less history (although its legend is quickly growing), it has the potential for much wider distribution and therefore more potential “believers”.

A common response to Nassim’s thread was that bitcoin’s appreciation preceded inflation, meaning that the market began accumulating bitcoin in anticipation of inflation. He responded that if that's the case, bitcoin should depreciate when there actually is inflation. He seemed to be assuming that the market’s view of bitcoin’s value was forward-looking, as in a 'buy the rumor, sell the news' dynamic. In other words, Nassim suggests that when we do have inflation, the market will expect the pendulum to swing back the other way, leading to a period of lower inflation and the market will move preemptively to dump bitcoin. This can’t be tested until a full inflation cycle plays out but Nassim is again assuming that BTC only has value as an inflation hedge.

Interestingly, Nassim’s point also assumes that runaway inflation will be correctable, but given how difficult it was for central banks to raise rates after 2008, there is some doubt. And that doubt is what part of the bet on BTC is based on: the super bull case for bitcoin is that fiat is too far gone to be saved.

Nassim’s final tweet is a comparison to gold: he says that gold ceased being an inflation hedge in the early '80s. Whether that's true or not is less important, but what is important is:

  1. BTC is not gold: it's far easier to purchase and store, among other things, and

  2. There hasn't been much inflation since 1982 (less than 2.5% per year)

So his timeline isn't a very useful comparable for 2020/2021, which is a period of record money supply increases across the board, and especially in the world reserve currency.

I’m not smarter than Nassim Taleb, I just think tweets are easy to fire off without much thought. I do wish he would take bitcoin seriously, though, as I’d love to hear his serious analysis. 

An interesting thing about the crypto space is how power-phobic it is: almost anyone with an inflated ego and/or the need to acquire or demonstrate power are quickly disillusioned by this new world--there are none of the usual vanity crutches to lean on, no hierarchy to climb, no system to game, no aristocracy to enchant, no serfs to rule.

[Update: Nassim has since published ‘serious analysis’ and his position is broadly the same.]