Bitcoin Is A Ponzi Scheme, According To Taleb

Nassim Nicholas Taleb, the controversial author of Antifragile, The Black Swan, Skin in the game and Fooled by Randomness, has changed his mind about Bitcoin.

Not so long ago, he recommended having some exposure to crypto in a balanced portfolio. Now, he reckons, its too volatile to be a reserve asset or even a hedge against inflation.

What happened there？ Why did he change his mind？ Should we listen to him now or keep his former advice？

Lets have a look.

Bitcoin is a decentralized currency with no government, company or institution behind it. It is run by a network of nodes and miners and supported by the market forces of supply and demand. This makes it uncensorable, transparent, fungible, and permissionless.

Taleb has always had the thesis that a decentralized system is more robust than a centralized one. He is bearish on Europe, the USA, or China, for example, and bullish on Switzerland or Singapore. His money is on small city-states rather than large economic organizations like the European Union.

A centralized system tends to become too bureaucratic, top-down, inefficient, and corrupt. The former Soviet Union is a good example of this — they couldnt even arrange a proper system for distributing bread, hence the infamous queues at bakeries.

Central governments, big corporations, and pyramidal hierarchies have a central point of failure and therefore are susceptible to attacks. Decentralized systems like ant colonies, Linux, or Guerrilla wars are almost impossible to pinpoint making them unassailable.

Bitcoin is highly decentralized. There is no one running the show. Even Satoshi Nakamoto (the creator) has disappeared, leaving the algorithm and the consensus mechanism to run the show. The only ways to destroy Bitcoin are by a 51% attack, quantum computing or shutting down the entire internet. Any of these events is highly unlikely and even if they happen, there is defense against them.

Bitcoin is censorship resistant, even when governments tried to stop it, it has become stronger. This is the definition of antifragility, a concept coined by Taleb himself

The US and China have had attempts to restrict the crypto ecosystem. Ironically these two countries have the highest BTC adoption in the world. Like the mythological hydra, when one head is cut off, two more would grow back in its place.

There is another currency that is partially or totally banned in several countries — The US dollar. Guess how effective that ban is.

When people need a proper currency and a store of value, they always find a way to get it. Traditionally, gold has been the safe haven in times of crisis. In developing countries, the dollar is still king. But now the markets are embracing Bitcoin as a reserve of value and as a hedge against inflation.

Taleb argues that Bitcoin can never be a hedge against inflation because it keeps going up in price.

I must admit I‘m very confused about this claim. Bitcoin goes up 200% a year while the dollar goes down 15%, one is deflationary, the other is inflationary. When bread goes up in price in Venezuela, it’s not the bread that is inflating, its the bolivars.

The price of any asset goes down when measured in BTC, therefore it effectively functions as a hedge against inflation.

According to Wittgensteins ruler: if you use a ruler to measure a table you may also be using the table to measure the ruler. Measuring assets in FIAT is deceiving because these are not stable. It is like measuring length with an elastic band.

Stocks and property prices have been going up for the last few years, but thats not a true reflection of their value. It is the dollar that has been going down instead, making everything look more expensive.

Measure everything in gold or Bitcoin and you‘ll find that prices have been either stable or going down steadily since the beginning of C-19. That’s a more reliable measuring stick.

Taleb argues that Bitcoin is too volatile to be a store of value.

Again, I‘m confused. What’s wrong with volatility exactly？ One should think that most investors would be quite happy with an asset that keeps going up in value, even if every now and then suffers from some corrections.

I want more volatility, not less. If you want stability, deposit your cash in the bank and get a generous 0.1% interest minus the commissions. Thats very stable. But if you want to make some money, you have to take some calculated risks and embrace volatility.

Taleb is a big proponent of the Lindy effect — If something has been around for 100 years, it will probably stay around for another 100 years.

Books, movies, and art usually follow this rule. The bible has been in print for 2 millennia so by the year 4000, itll probably still be around.

Now, Bitcoin has only been around for 12 years, that‘s not a lot. But in this fast-paced technological world, 12 years it’s an eternity. It could be argued that a technology that survives ten years or more, its probably going to make it.

Think of Google, Apple, FB or Amazon. Will they still exist in 20 years？ I think so.

Once a technology reaches the tipping point and benefits from the network effects, it‘s quite difficult to take it down. Even if a superior technology comes along, it’ll have to fight Metcalfes law: the value or utility of a network is proportional to the number of users of the network.

Some say that Bitcoin will be replaced by a new digital currency with better technology, lower costs, and higher speed. I doubt it.

You could probably make a better burger than McDonald's but, are you likely to become the next fast food tycoon？ Not likely.

McDonald, Bitcoin, Coca-cola, the internet, and Facebook are all based on network effects — the more people joining in, the stronger the brand becomes and the harder it becomes to replace.

The Lindy effect is real, and it also applies to technology. Combined with the network effect it propels the first mover advantage exponentially.

Taleb thinks that Bitcoin resembles a Ponzi Scheme. Here, hes totally right.

Do you know what other things could be considered Ponzi schemes？ Gold, real estate, the stock market, pensions, and the economy as a whole.

All these systems are fundamentally pyramidal. They are sustained only by trust in the system and by the belief that it will keep going up forever. The moment that trust disappears, the whole thing could collapse like a house of cards.

The Dot-com bubble, the subprime mortgage crisis of 2008, and the Japanese recession of the late 90s are all Ponzi schemes gone wrong. Gold, the dollar, and property are Ponzi schemes retaining some value… for the moment.

The question is not if Bitcoin is a Ponzi scheme, the question is: which Ponzi scheme is better？

Would you buy dollars when they are printing 1.9 Trillion out of thin air every other month or would you rather own BTC which total supply is capped at 21 million？

The whole economy is based on bubbles, Ponzi schemes, and trust in systems that cant be trusted. Anyone looking for intrinsic value should go back back to barter and self-sufficiency. Everything else is just fiction.

One advantage of Bitcoin is that it‘s trustless. No need to rely on central banks, the government, or financial institutions to back your money, it’s back by math. Still subject to the market‘s forces of supply and demand but it doesn’t rely on any inefficient and corrupt institutions.

Its a Ponzi scheme, but one that will keep growing for at least 1000 years.

Taleb made all his money by taking extreme risks in highly volatile assets and betting against the system. He saw a bubble, shorted it and made millions from it. He got all the money he needed to be free and not have to depend on a boss or customers. Hence the expression: F*ck you money.

Now, hes saying Bitcoin is a bubble. Is he right？

We are certainly in a bubble and its certainly going to explode, the question is: Which one？

Is bitcoin the bubble or is it the needle that will burst all the other bubbles？ The stock market, the banking system, the trillion-dollar printing machines, and centralized economies seem very bubbly to me.

That is the question you have to ask yourself. Pick the right bubble, put your money there, get your F*ck You money and run.

Taleb hates bankers, economists, and politicians. He despises institutions and politicians that play games with other peoples money and make fortunes even when their customers lose everything.

He is a rebel that has gained many sympathies (including mine) for calling a spade a spade. When bankers make profits, they get bonuses, when they go bankrupt, you pay for it. Not fair.

It could be argued that Bitcoiners have a lot of skin in the game. I doubt that any Crypto proponent doesn‘t have at least 10% of their portfolio in either BTC or Ethereum. Putting your money where your mouth is, it’s consistent. Unlike bankers and politicians, they are taking real risks.

I, for one, would like to live in a world where people are compensated for their sound decisions and punished for lousy ones. Like the roman engineers that were forced to live under the bridge they had built, we should have systems in place that force politicians, economists, and bankers to take real risks. If they ruin peoples lives, their life should be ruined as well. Instead, they keep their bonuses and enjoy luxury retirements with the money they stole from you.

Mr. Taleb used to own Bitcoin, recently he sold it. He is putting his money where his mouth is, nothing wrong with that. But by selling Bitcoin, he is buying dollars — an inflationary bubble supported by a corrupted system of bankers and politicians he highly despises. I can see a big contradiction here.

Why？

Taleb is a contrarian. He enjoys pissing people off. Hes opinionated, cantankerous and even rude at times.

Here‘s a quote from one of his reader’s:

“The problem with Taleb is not that hes an asshole. He is an asshole. The problem with Taleb is that he is right.”–Dan from Prague

He got it right once and made millions from it, but before that, he was wrong many times. Thats all you need to make a fortune: to be right just once.

Im a contrarian myself. I can relate to all the stuff Taleb writes about. Most people get it wrong most of the time, so by following the crowd, you are following the lemmings to the precipice.

Its good to be a contrarian but one should not take it too far. If you become a contrarian to the contrarians, you become the crowd and the precipice will be there waiting for you.

Now, identify who is the crowd and who is the contrarian and choose your side.

Is it the 1% of crypto holders the crowd or is it the 99% that think crypto is a scam？ You decide.

Read the news, listen to politicians, go to your bank and ask for investment advice. It will become apparent who is the lemming here and where they are heading.

Nobody knows the future. Things could skyrocket from here or totally collapse, but one thing is clear, when a superior technology arrives, it eventually takes over the world. Think of the internet in the 90s, despite all the naysayers it changed the world beyond recognition. Can bitcoin be compared to the internet？ Some contrarians with skin in the game and f*ck you money think so. Will they be right？ Well see.

Taleb is the best philosopher, economist, scholar, writer and mathematician out there. I reread all his books every year and keep learning from his wisdom. He has changed my life.

I got into Bitcoin because of him and now hes abandoning the boat.

This time I will not listen to him. I think hes been blinded by his addiction to being a contrarian. Sometimes you just have to do what feels right and not let the crowd influence you one way or another.

None of his recent tweets are very convincing. He just seems to be angry about this new monetary technology becoming so successful, but thats not usually a good argument against it.

I have skin in the game, hopefully, one day I will get F*ck you money. But that‘s only if we don’t encounter a black swan event that destroys everything on its path. Luckily, Black Swans are rare by definition, but one never knows…

Perhaps the black swan here is Bitcoin and Fiat is the victim. Well find out soon enough.

Not financial advice, for that ask Mr. Taleb.

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