Paper: Bitcoin, Currencies, and Bubbles

This discussion applies quantitative finance methods and economic arguments to cryptocurrencies in general and bitcoin in particular —as there are about $10,000$ cryptocurrencies, we focus (unless otherwise specified) on the most discussed crypto of those that claim to hue to the original protocol \cite{nakamoto2009bitcoin} and the one with, by far, the largest market capitalization.

Link to Paper –

Answering questions and providing derivations for the #bitcoinblackpaper

Link to Supplementary Material / Simplifications –


  1. Excellent writing per usual Taleb, but you seem to be overlooking some important things.

    Named no derogation to alternatives, as well as abject neglecting the existence of the LN.

    It’s a bit odd- like decrying the failure of the first automobiles, while ignoring the very real upgrades that have happened since.

  2. Hey Nassim,

    You are a rockstar in my opinion. But in this case you seem to be too smart understand it or you purposely pose as a Bitcoin basher to gain more attention.

    You assume that the miners will stop mining. How do you come to that idea? This is highly unlikely! Because if they do, the difficulty will go down and I will spin up my pc to start mining!

    You also proclaim that it is not possible to earn income with bitcoin, which is also false! There are plenty of platforms where you can lend people your btc for a yield.

    In the currency section you act as if The Lightning Network wouldn‘t exists. This a quit obvious mistake that you make. El Salvador uses the Bitcoin/Lightning rails while still using the USD as their main denominator. This will happen all over the world and render western union obsolete, give people hope and much more control over their econmoical well being.

    Maybe you can‘t get your head around those facts, but to ignore them in this paper will make it very easy for people who really understand Bitcoin to dismantle it. (I am not one of them and yet I still easily find huge mistakes in this article)

    1. Ok, Western Union. Sure, why not.
      I send my relatives in El Salvador BTC worth $5000 to free my kidnapped brother, because the ransom is in USD. The value drops on the next 5 minutes after sending it, which could take 5 minutes to be received. The kidnappers feel cheated and, since they need to keep their cred, kill my brother because they didn’t get all the money they asked for. Or, maybe, they are merciful and just keep asking for more. No way to find them, however, since the receiver enjoys complete anonymity.
      Looks like a great innovation. You know, like the one that gave BTC it first real bump.

      1. It is not true that there is no way to find them. Maybe difficult but not impossible. You could make the same argument about a car used in a kidnapping. The criminals wouldn’t be able to escape so quickly if only that damn car hadn’t been invented. The vast majority of people just want to be free to drive around though. Likewise, criminal enterprise on the blockchain makes up a very small percentage of the activity.

  3. Add also that any currency to be able to exist and flourish must have four fundamental characteristics as in the acronym, C.A.S.H.:

    C for Convertibility,
    A for Acceptability,
    S for Security and
    H for Homogeneity!

    1. You forgot one that is the most obviously feature of PoW crypto:
      If the price of any staple can regularly go up or down 5+% every few hours and go up or down 150-300% over 1 year’s time, I suggest this is not even remotely a reasonable store if value and definitely not a “currency”. It’s a scheme.

  4. “Energy is the only universal currency: one of its many forms must be transformed to another in order for stars to shine, planets to rotate, plants to grow, and civilizations to evolve.”
    ― Vaclav Smil

  5. great paper. in response to criticism of becoming obsolete to newer tech/ and inefficiency, look at lightning network/layer 2.

  6. Just heard of something doing this and blew my mind! Would love to know your thoughts… Creating a currency that’s actually better than fiat:

    1. Free (sometimes better than free) to spend.

    2. Tracks supply/demand within the economy (MV=PT) to create intrinsic stability.

    3. Designed to incentivize ecological Regeneration (because without a thriving ecosystem, what’s the point?).

    4. On something that’s not PoW but apparently it’s already carbon negative.

    It’s called seeds at joinseeds[dot]earth – what do you think?

  7. the old adage was

    Money has these functions four: a means, a measure, a standard, a store.

    A means: a means of exchange to speed up transactions over laborious barter

    A measure: money allows us to compare different options – steak dinner for $100, or movies for $40?

    A standard: an agreed upon way to settle debts. US notes say specifically they are ‘legal tender’ for all debts.

    A store: A thing that keeps value over time

    BTC arguably can do 1), but it does a piss-poor job of it currently. It can do 2), but it is not and will never be 3), and it is not and never will be 4). Therefore, it’s a speculative game that many people have played profitably. However, it always depends on a greater fool *with money*. Statistically, the latter have always been in short supply, and the supply is getting squeezed.

  8. Maestro,

    Does the real life application of Bitcoin transported on the Lightning Network utilized for instantaneous, sub-1-cent transactions (at fees of 0.00000001 BTC) change your thinking? It enables use cases that have hitherto been uneconomic.

    This is not theoretical. It is working in the wild.

  9. So who came up with the “four fundamental characteristics” that are needed to be a currency?? Trade use to be a form of currency on the entire planet. Money is only worth what someone is willing to pay for it. Crypto is only worth what someone is willing to pay for it. That is called free trade.
    Crypto isn’t going anywhere because too many people on the planet want it to be a form of currency. And frankly nobody is going to stop that. Nobody

  10. in response to tech becoming obsolete, certain technology gets so prevalent, used everywhere that its more convenient to build on top of it. A few examples, c, c++, and html. So layer2 on bitcoin

  11. Stick to doing what you do well because it is painfully obvious after having read this that you know little to nothing about technology or finance. If you think that blockchain is a useless technology I strongly suggest you get some schooling on the subject.

  12. Bitcoin will never be able to buy me a breakfast as due to its volatility, the moment it seems attractive to me it would seem unattractive to the maker of breakfast and the trade would cease to take place. The same is true for all exchanges with Bitcoin, the world of transactions cannot take in a volatility like a paired puzzle, the incentives for buying cannot be disincentivized as the value reverses for selling.

    1. Your excellent paper contains an egregious oversight. We communicated by email in 2013. How would I contact you now?

  13. My concern is how much has gone into Institutionals , banks (who we end up rescuing), funds and ETF’s , derivatives.
    In 2007 everyone believed Banks would not didn’t keep subprimes in their B sheet, but they did have them in their belies.
    Now there are 10,000 different coins.
    Market cap 1.31 T USD.
    This time is different?

  14. The author does not satisfactorily address the inherent value of a technology that automates an immutable public ledger.

    The author’s arguments are primarily clickbait related to the popular libertarian arguments for Crypto. Here the author is quite learned, and I find his arguments in this arena satisfying, e.g. libertarian arguments are very dumb and annoying. The worst arguments for an economy are based on fixed moral and political ideologies, and this seems to be what got the authors panties all in a bunch. In a better paper, the author would be more forthright with his thoughts on ideology, while looking at crypto technology as a phenomena bracketed-off from society, then we might began to shed light on potential Black Swan social events currently underway and which will only be fully apparent after the crypto hype dies down.

    My favorite element of the paper is that the author does not ignore a species being — a human element — at the center of currency, even while underestimating the value of a ledger system that does not require laws enforced by untold banking employees, private computer systems, law enforcement, military, government, and international regulatory systems to maintain it. Again, I may be overestimating the technology, but it seems to me the automation of a large portion of a banking system has limitless value. The author needs to address the question of automation before I can agree that the value of BTC is zero. Obviously, a comparison to fiat or metals is nowhere near satisfactory, and the author should know this, which causes me to question deep-seated, perhaps unconscious intentions of the author, related to her or his own pocketbooks.

  15. Obviously if bitcoin is not money, then it is worthless, and there is no need to use complicated math to prove this point. However it is a generally accepted fact these days that fiat money is valuable simply because if you do not use it, you will wind up going to prison for tax evasion. Bitcoin allows criminals, such as heroin dealers, ransomware hackers, etc. to avoid prison, just as the US dollar allows law abiding citizens to avoid prison by paying taxes. Hence, Bitcoin is a type of fiat money for criminals, and is therefore valuable at the very least for this reason. And of course citizens of China and Venezuela use it to avoid currency controls imposed by their respective governments. We may not believe these people to be criminals, but the rulers of China and Venezuela certainly think otherwise.

    1. As quoted from the paper:

      By its very nature, bitcoin is open for all to see. The belief
      in one’s ability to hide one’s assets from the government with a
      public blockchain easily triangularizable at endpoints, and not
      just read by the FBI but also by people in their living rooms,
      requires a certain lack of financial seasoning and statistical
      understanding — perhaps even a lack of minimal common
      sense. For instance a Wolfram Research specialist was able
      to statistically detect and triangularize “anonymous” ransom
      payments made by Colonial Pipeline on May 8 in 2021 [21]
      — and it did not take long for the FBI to restore the funds.

  16. Hey Nassim,

    Big fan of your work. May I suggest you spend some time learning about the Lightning network, I would love your opinion afterwards. In this paper you covered bitcoin’s inability to scale (number of transactions, fee per transaction) but not once do you mention the Lightning Network. Seems like a massive oversight/miss and largely discredits the paper. Assuming it was just a miss and not intentional, given it really hurts your paper’s overall thesis, an edit would be lovely!

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