Bitcoin Black Paper

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[kaggie]

It is a well written article and points worth considering. Though, at no point in that article did the author justify a zero value of bitcoin.

Take his statement, "Note that bitcoin is zero sum by the principle of numerous clausus."

That sounds fancy, but means what? I can state that bitcoin is negative sum AND positive sum, and completely be correct.

Bitcoin is positive sum because it takes much less energy to increase its value than to decrease it. It will always go up, because it can never go to zero. OTOH, bitcoin is negative sum in terms of the total number of bitcoin that are not lost permanently, hence its deflationary aspect. Bitcoin can be either negative or positive sum if it's value is measured in other currencies, and the market cap changes. The value of other currencies coming in/out does not have to be equal to the total value of bitcoin measured in those currencies for bitcoin to change in value.

Following that, the author says "Earnings free assets are problematic" giving the example of dividends paid by stocks.

As if people buy stocks for dividends. Where does the author think that the value comes from to pay dividends? Dividend payments derive from stock values going up, and from a company selling a portion of its stocks. (Dividends sound like a Ponzi scheme TBH..) This was after the author pointed out that people invest because they expect an increase of value in the future... and somehow the author missed that link with bitcoin.

His "Principle 1: If  any  non-dividend  yielding  asset  has  the  tiniest  probability  of  hitting  an  absorbing  barrier,  then  its  present value must be 0."

This seems like an insane principle. Every asset has the tiniest probability of hitting an absorbing barrier. All assets will.

So, according to this principle all assets that exist have a present value of zero -- because all assets will eventually go to zero. It's impossible not to given enough time.

Like, wtf, I can't wrap my head around why someone would make this a driving and first principle of anything. (I note that I have a related principle about bitcoin, but oppositely defined above.)

I was going to review the rest of this article, but this already is on such an insane premise for its first principle that I don't think I can without gagging.

Barf.


His Comment 1: "Gold and other precious metals are largely maintenance free,  do  not  degrade  over  an  historical  horizon,  and do  not  require  maintenance  to  refresh  their  physical properties over time. Cryptocurrencies require a sustained amount of interest in them."

Again, the author argues that the gold is maintenance free.

So? Bitcoin is too in much the same ways.  You don't have to be the one mining gold / bitcoin for them to be exchangeable in the future.

But if mining or market forces determine that either is less valuable because either are used less or speculated on, then what you hold will decrease in value. As the author points out, 10% of gold is used for jewelry, yet you can have decades of worth from that. This is an incomplete argument to justify the value of gold, or my trousers would be worth more than gold.

The author points out that gold had a peak decades ago and never regained its market value. Gold, like bitcoin, is therefore tied to its speculative value.

The author writes that commodities do not make good bases for currencies.. which I would argue is a justification of why you want a currency like bitcoin, which is less tied to the actions of an individual or group that can be criticised.

--

Even in the end fallacies, the author creates fallacies.

I ignore the first point about libertarianism. What you call something is less important than what that something does. Arguing what libertarianism is silly unless it is impacting the market value.

He states that fallacy 2 is that bitcoin is a "safe haven", with the remarks about how it fell with the market crash of 2020. Everything fell with the market crash of 2020. He says that it fell more than the stock market. This shouldn't be so difficult to understand, but a smaller market will fall faster than a larger market. Rightly though, this points out that bitcoin is tied to stock market value. We didn't need a large market crash to see this.

His fallacy 2 is a fallacy though. The hedge of bitcoin is not its decoupling from the stock market, but from its decoupling from any individual nation. Bitcoin is an international currency tied to people across the globe, and their willingness to buy in or trade with it. This is the "safe haven" hedge.

To argue against his fallacy 2 specifically, bitcoin has outpaced that market crash and other inflation. Again, we see another "safe haven" hedge reasoning for bitcoin -- that if there is an influx of inflation from payouts so that people stay at home, they will invest it into something like bitcoin, raising its total value, and outpacing the market and inflation.


These presumptions of his fallacies are made with such short arguments without considerations of the arguments against them that they aren't justified.


[moderator's note: consecutive posts merged]

[bitmover]

Nassim Taleb is a very wise and respect man. Author of many books about randomness and one of the world most respected person in this area. He cames from the financial market and his article is something he considered a lot before writing it.

I don't think that can be so simple refuted as kaggie  pointed out, specially because his whole point is based in a risk management idea that everything is fallible.  There is a failling point somewhere in bitcoin protocol, we just dont know where it is. As Nassim Taleb said, the only thing that is infallible is God.

This is true for every security and asset in the world, and I don't think bitcoin really should be any different. We should always try to think bitcoin rationally,  and certainly there is a cult here (myself included) that bitcoin is something infallible and perfect.

I watched the 15min video and I didn't really get all math at first. I will watch it again, there are good points to consider in his video, and Nassim taleb is not a fool neither someone getting paid to write it

As if people buy stocks for dividends. Where does the author think that the value comes from to pay dividends? Dividend payments derive from stock values going up, and from a company selling a portion of its stocks.

Yes they do. Dividends are the revenue of companies, dividends has nothing to do with stock price.

There are stocks which don't pay dividends such as Amazon because they reinvest that revenue back into the company to generate more revenue.

[kaggie]

Yes they do. Dividends are the revenue of companies, dividends has nothing to do with stock price.

Fair enough. (I disagree, because even if dividends reward based on performance, total company revenue is related to stocks. If a company is failing in stocks, I doubt you will see dividends for long. I'm not in finance so likely don't understand a technicality.)

I will agree with you that bitcoin is fallible. There are plenty of flaws. There are flaws in nearly every system that we use. The high energy use and transaction fees are two problems, but they are solvable.

I agree, in that I don't think you can throw out his article so quickly with my cursory arguments, as there are a lot of points worth addressing. If anything, hopefully that article can be used as a topic starter to address those issues.

But I clearly disagree with Taleb. Taleb writes: "Furthermore, there appears to be an underlying conflation between the success of a payment mechanism (as a decentralized mode of exchange), which so far has failed, and the speculative variations in the price of a zero-sum asset with massive negative externalities."

Within the abstract, he has lost me.

He says it has failed. How has it failed when it is worth so much? With these "massive negative externalities", bitcoin has gone from near worthless to 60k / bitcoin (now 30k) in a relatively short span.  You cannot claim that it has "failed" as a "payment mechanism", when now a first country has decided to use it as it official currency.

I am conflating what he says shouldn't be conflated. Yet, does he explain why it increases as a speculative asset? No, I didn't see it. Unless you can explain why it rises, (which he may not do because he thinks it's politically harmful,) then it's hard for me to believe the reasons about why it might fail. And that is my criticism of bitcoin criticisms. They are just as one sided as the protagonists. Neither feels complete.

Sure, it is not a payment mechanism for everyday items in every store that you are at. But I can visit several stores near me and purchase actual items with bitcoin. A top global billionaire is heavily invested in it. These are not failures.

[odolvlobo]

TL;DR: Nassim Taleb believes that Bitcoin is over-hyped and that it can never succeed because it has yet to of live up to the utopian ideals of its supporters, and also because of <insert FUD here>.

My chief complaint about this paper is that it is not a dispassionate analysis as you would expect. Instead, it is drenched in opinion and innuendo. It would more accurately be described as an essay written in the form of a paper.

The proof  of  work  method  has  an  adjustable  degree  of  difficulty based on the speed of blocks, which aims, in theory, to keep the incentive sufficiently high for miners to keep operating the system.  Such  adjustments  lead  to  an  exponential  increase  in computer  power  requirements,

While it can be argued that the exponential rise in energy usage is facilitated by the difficulty adjustments, it is not due the difficulty adjustments. The exponential rise in energy usage is due to the rise in price, which has been driven by the rise in adoption.

The implication is that ... if we  expect  that,  at any point in the future, the value will be zero when ... future generations get into other such "assets" and bitcoin loses its appeal to them,then the value must be zero now

Here he describes a paradox that applies to all money, and not just Bitcoin.

Comment 2: Success for a digital currency
There  is  a  mistaken  conflation  between  success  for  a "digital  currency",  which  requires  some  stability  and usability, and speculative price appreciation.

While I somewhat agree on his unstated opinion (that the current price does not necessarily indicate success), the comment ignores the fact that the current value of an asset is also based on the risk adjusted discounted value of its future utility. A high value now simply expresses an optimistic belief in the future utility of Bitcoin.

Gold stocks  were  growing  too  slowly,  and,  as  mentioned  earlier, much of it went to jewelry and industry —the most credible theory is that  there  was  not  enough  gold  to  keep  up  with economic government growth. Furthermore, there had been long debates over the hampering of monetary policy by sticking to metals, as  witnessed  by  the  bullionist  controversy.  It  appears  that developed  economies governments have  trouble  hemming  their  currencies to a commodity.

FTFY. What he is really describing here is the demise of a gold standard due to the failure of governments to maintain fiscal responsibility and, to some extent, the problems with the portability of gold.

[bitmover]

Yes they do. Dividends are the revenue of companies, dividends has nothing to do with stock price.

Fair enough. (I disagree, because even if dividends reward based on performance, total company revenue is related to stocks. If a company is failing in stocks, I doubt you will see dividends for long. I'm not in finance so likely don't understand a technicality.)

It doesn't work like that, it is the other way aground. Stock price is determined based in the company fundamentals, i.e., its revenues, profits, etc etc, not the other way around. If the price of the stock is failling, it is because the market is expecting that company to pay less dividends.

This is exactly what Nassim Taleb explaned in his article.
He said that this equation is "standard", he didn't created it. It is used everywhere in the world by risk management professionals to valuate any kind of security/asset.


https://www.youtube.com/watch?v=XeG0FzPxSh4

I really think it is worth investigating it further more. As I said earlier, this guy is a genius, a writter, a millionaire and an academic , nobody paid him to write that.

I will agree with you that bitcoin is fallible. There are plenty of flaws. There are flaws in nearly every system that we use. The high energy use and transaction fees are two problems, but they are solvable.

I don't think he is referring to that, I am not refering to that either.
 These are not problems of bitcoin protocol imo. Bitcoin was designed to expend a lot of energy.

Bitcoin primary objective is not to solve global warming, so it is out of scope of Bitcoin objectives.

Neither was it created to allow you to buy a cheaper coffee at starbucks. It is a decentralized money which no one can control, and it is having success in it.

Failures, imo, would be like a critical bug that would allow to change past blocks without no one noticing (virtually impossible, but well, what if...?).
Of a critical bug that would allow double spending, or that would allow to spend money without private keys and so on. That would be a failure.

He says it has failed. How has it failed when it is worth so much? With these "massive negative externalities", bitcoin has gone from near worthless to 60k / bitcoin (now 30k) in a relatively short span.

...
I am conflating what he says shouldn't be conflated. Yet, does he explain why it increases as a speculative asset?

( I don't agree, just telling what he said in the article/video)


He says that bitcoin is basically a ponzi, that the volatility makes it so that it is not a currency, but a security.
This is why it failed as a payment mechanism

You cannot claim that it has "failed" as a "payment mechanism", when now a first country has decided to use it as it official currency.

Basically a failed country adopted as a oficial payment option, and not the only one. They still use fiat currency, USD.

Personally, I think there is a lot of fuzz about it now but if there will be a big bitcoin adoption there is still uknown.

[kaggie]

I'll have to read it again to see what his arguments actually were. It boiled down to a few levels of FUD.

1) The lack of dividends is a new one that I'm unfamiliar with. I can't see the argument, as non-dividend giving stocks are highly valued (Google; Amazon) and similarly assets [gold; land]. The principle that any asset that can go to zero in the future should presently be valued at zero, as written, ignores time and present utility.

2) With starbucks coffee purchases, Satoshi didn't write "currency" in his white paper. I wonder whether there were similar connotations about "currency" being smaller "starbucks transactions" in 2008.

Satoshi made bitcoin to store wealth. That's what the initial block is about. Not about small transactions. He could have made a larger block size then, but didn't. I'm glad he didn't. It would suppress bitcoin's price, probably (frequently used things are commonplace, not valuable, oddly). The smaller transactions helped bitcoin grow, but once it peaked beyond them, it priced itself into a larger market. The speculative market possible is much larger than is currently being used for bitcoin.

2b) The other FUD argument often used is the energy usage. I agree in that I don't care about whether I can use it to buy starbucks. A decentralised global solution involving everyone everywhere is a terrible strategy for starbucks purchases. Lightning might work. The energy usage isn't real FUD, because of the auto-compensating difficulty level of bitcoin, which now has 50% less energy usage over a weekend.  (Is it half as much as Christmas lights then?) As we've seen, the energy usage rewards miners, while simultaneously limiting miners, which keeps the network going with high capacity hardware. The energy usage has created bitcoin growth.

Failures, imo, would be like a critical bug that would allow to change past blocks without no one noticing (virtually impossible, but well, what if...?).
Of a critical bug that would allow double spending, or that would allow to spend money without private keys and so on. That would be a failure.

Critical software flaws weren't what he was referring to, was it?

There have been a few rare level-2 critical flaws, that luckily haven't yet been (level-1) bitcoin stopping flaws. They could have been.
* There was the bitcoin core ECDSA poor randomisation issue a few years ago. https://www.researchgate.net/publication/335577495_ECDSA_weak_randomness_in_Bitcoin
* Political, social: Governmental/corporate intervention, CSW..

He says that bitcoin is basically a ponzi, that the volatility makes it so that it is not a currency, but a security.
This is why [he says] it failed as a payment mechanism

Personally, I think there is a lot of fuzz about it now but if there will be a big bitcoin adoption there is still uknown.

That may be, but..
The volatility is just enough that it will be further adopted. It attracts new investors. No matter how far bitcoin falls, it will hit some bottom from people who have sold out. Any number of these and new investors will be interested in making a profit and reinvest. It will go up, which will also attract new investors.

Ok, I don't know whether it is used as a payment mechanism. This isn't necessary for its success though. As it rises in adoption, it will increase as a payment mechanism.

Paradoxically, the evolution of bitcoin could be from:
speculation (early idealogues) -> payment (small drugs) -> speculation (moon-bois) -> payment (houses, international settlement), with increased savings from people who have collected along the way.

Even recently, many people have only just been introduced to bitcoin. It takes time for them to become used to the idea. FOMO will set in on larger and larger scales, with plenty of falls along the way.

We haven't seen the end of the bitcoin story; barely the beginning.

[odolvlobo]

He argues that "the second term vanishes under the smallest positive discount rate" and this is correct. But discount rate is dependable on time itself and  can be both positive and negative. Therefore d should be replaced with d_i. This brings  a difference into summation and P_t may grow over time.

I believe that the flaw in his analysis is even more basic. He incorrectly assumes that there is no cash flow, but while there is no periodic cash benefit from holding bitcoins, there is a periodic utility benefit from using bitcoins.

This is basically why any money has value despite not having a cash flow. I don't know why he doesn't get that.

[hatshepsut93]

Anytime someone says they will prove something with math, I'm bracing myself for a load of bad science due to poor methodology, numbers pulled out of ass, made-up equations and so on.

I agree with possibility that Bitcoin could decline by 95% or more if existing users will lose faith in it and there will be no adoption, but there are absolutely no signs of it happening, in fact it all looks the opposite as Bitcoin gets more and more recognition with each year.

[brainactive]

This is equation he refers to:

https://www.fooledbyrandomness.com/BTC-QF-appendix.pdf

where r_d is discount rate.

What is he trying to say with this equation?

Is he basically saying: for an asset that doesn't produce cashflows, the price mathematically either goes to infinity or 0, it can't go to infinity (for obvious reasons) so it must go to 0?

[pooya87]

As I said earlier, this guy is a genius, a writter, a millionaire and an academic , nobody paid him to write that.

I don't know about genius but he is definitely controversial. He is not even taken that seriously in academia because his works are all filled with a lot of controversy. He is being "paid" by selling those books by the way.
He is also very wrong on a regular basis. For example in 2010 he was predicting with absolute certainty that hyperinflation is coming and was calling everyone to short the market!

The fact is that you can't explain everything with math and coming up with a equation doesn't mean anything specially when the conclusion is made first then some technobabble is created to justify that conclusion.

[odolvlobo]

What is he trying to say with this equation?

Is he basically saying: for an asset that doesn't produce cash flows, the price mathematically either goes to infinity or 0, it can't go to infinity (for obvious reasons) so it must go to 0?

Yes, that's basically it (with some assumptions).

[NeuroticFish]

Stock price is determined based in the company fundamentals, i.e., its revenues, profits, etc etc, not the other way around.

I think that stocks too are hyped and overpriced. And it's something interesting as a starting point, since they are considered economically valid and they're expected to (usually) rise. Why's that? Because of human inherent greed.
Gold... all the precious metals are highly overpriced because they are (falsely) considered scarce and they're being hoarded, of course, especially gold. Of course, greed is again a big factor.


And now Bitcoin. Indeed, if there would be no demand for Bitcoin, the price would "go to 0". But human greed was triggered and this makes Bitcoin get hoarded, and this makes the price rise instead of going to 0.
So, with all due respect, since "the equation" doesn't take any "amount" of greed into account, it's simply wrong.

[brainactive]

What is he trying to say with this equation?

Is he basically saying: for an asset that doesn't produce cash flows, the price mathematically either goes to infinity or 0, it can't go to infinity (for obvious reasons) so it must go to 0?

Yes, that's basically it (with some assumptions).

In the video he then says the equation doesn't hold for gold because it's got use cases. Based on that argument can't you say the same thing about Bitcoin?

[ropyu1978]

every aspect of this deck is designed to reflect the Bitcoin currency - the look, feel,
This box features premium soft-touch black dyed paper with interior/exterior black foil. No details are left behind. The Satoshi Nakamoto White Paper is inscribed on the inside of the card box in the United States Declaration of Independence font. Peer-to-peer CASH system.

[bitmover]

So, with all due respect, since "the equation" doesn't take any "amount" of greed into account, it's simply wrong.

What you call "greed" is the "expectation of the price"  and it is in the equation
you are correct, this is one of the most important (or the most important)  factor driving the price.

Basically everything you said is "overpriced" because the market expects that those stocks/gold/bitcoin will have more utility/benefits/dividends/etc in the future than now. This is what you called greed and usually people call expectation.

This is basically why any money has value despite not having a cash flow. I don't know why he doesn't get that.

He doesn't consider bitcoin money or currency because he said it is too volatile. I don't agree, but that's the premise of all this article. He considered it a security, like gold or a stock, not a currency.

Personally, I don't think it is too volatilte for a currency. Brazilian Real is almost as volatile as bitcoin (but it just goes down lol)

I've been getting rid of my BTC. Why? A currency is never supposed to be more volatile than what you buy & sell with it.
You can't price goods in BTC

In that respect, it's a failure (at least for now). It was taken over by Covid denying sociopaths w/the sophistication of amoebas
https://twitter.com/nntaleb/status/1360276917992230919?ref_src=twsrc%5Etfw
https://www.bloomberg.com/news/articles/2021-02-12/-black-swan-author-calls-bitcoin-a-failure-at-least-for-now

[NeuroticFish]

What you call "greed" is the "expectation of the price"  and it is in the equation

Hmm, it can be it, but then something else is/feels wrong...
In my eyes greed is somewhere higher than (logical) expectations. But, I admit that I might be wrong.
Still...

Basically everything you said is "overpriced" because the market expects that those stocks/gold/bitcoin will have more utility/benefits/dividends/etc in the future than now. This is what you called greed and usually people call expectation.

Actually one buys gold because he expect its price to rise, simply because he expects less to be mined and more to be hoarded by others/banks. The fact gold is used in jewelry and industries is insignificant.
Same with stocks. Many don't buy stock because of dividends or to become member of the board. Instead he expects their price rise. Here indeed, reinvested profit may have a role which I don't know how big is.
So while the equation may be closer to reality for stocks, it is missing something for Gold or Bitcoin. And if it's not greed/"expectation" then it must be something else, since for decades Gold seems to go farther and farther from 0. And it has a chance to reverse the rising trend only if the scarcity theory is proven to be false.

[BlackHatCoiner]

That:

He considered it a security, like gold or a stock, not a currency.

I believe that anyone who thinks it similarly, is very much missing the point. I'll leave stocks and refer to Gold, because Bitcoin looks like as a digital asset, rather a share of a corporation. The value of Gold originates from its future usage. It comes from the useful products one can make out of it in the future.

Bitcoin's value originates from its future usage as well. It comes from the benefits one can have by using it as a currency. So, while you can, indeed, use both as a safe haven, in the first case you're saving the value of those future products and in the second, the usage of it as a currency. And that's true of you think about it; anyone who keeps it as a store of value plans to sell it in the future, to someone who will want to use it as a medium of exchange.

If we all kept Gold and Bitcoin as stores of value, they wouldn't have any essential value; it'd just be a belief.


I'd really want to get a response from the writer of that paper. I doubt that he'll ever read this, but SEO does its tricks sometimes:

Code:

Nassim Nicholas Taleb
Bitcoin, Currencies, and Bubbles
Universa Investments
Tandon School of Engineering, New York University
Forthcoming, Quantitative Finance

[buwaytress]

As I said earlier, this guy is a genius, a writter, a millionaire and an academic , nobody paid him to write that.

I don't know about genius but he is definitely controversial. He is not even taken that seriously in academia because his works are all filled with a lot of controversy. He is being "paid" by selling those books by the way.
He is also very wrong on a regular basis. For example in 2010 he was predicting with absolute certainty that hyperinflation is coming and was calling everyone to short the market!

The fact is that you can't explain everything with math and coming up with a equation doesn't mean anything specially when the conclusion is made first then some technobabble is created to justify that conclusion.

I don't know enough to comment on the academic rigour of that, but I'm reminded often of how some geniuses in the many disciplines of science and math were ridiculed and mocked by their peers during their lifetime, only to be recognised posthumously. I mean, I've read how Hayek (economics Nobel) has been thrown about by altcoins claiming his model, predicted 50 years ago, is finally coming through. 50 years, 500, I suppose everyone eventually becomes right (and can't really be proven wrong with finality).