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.

    2. Miners will stop mining when the difficulty gets too hard and nearly all the 21 million has been mined. (~2040) Transaction fees are not enough to sustain it, especially as a store of value, as it’s often pitched. As the transaction fees go up, it’s utility worsens.

  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.

    1. Reponse to bobbydillons:
      The energy waste problem is a small present concern, but not the biggest issue with cryptos. It can be solved.

      The bigger issues is that a currency proper is an I.O.U. That means someone promises to redeem. If they default their “currency” (IOU) will devalue. No one stands ready to redeem a single bitcoin. It is the black market which currently props up crypto valuations. And why are cryptos always “valued” in state currency units? It’s because they are not the currency, the state unit of account is the currency, backed by the frickin IRS (you do not mess with them, and bitcoin will never be able to undermine the IRS, they are backed by the US Army).

      Another big issue is that private cryptos are only useful as countertrade tokens, nothing more. You cannot run an equitable system of trade based on such tokens, no one stands ready to redeem them for anything, and they get hoarded, rather than circulated, and that utterly defeats the purpose of a monetary system. The ideal monetary system is one where no one saves, everyone spends all their income, because that practically guarantees zero unemployment. Because crypto is hard to come by, it gets hoarded, and that’s the crux. It’ll never be a good monetary system, it’ll always favour the rich, the first to get in. Ponder this for a money and you’ll see why the whole cryto world is really an utter scam, a vehicle for those who are lucky to get in first, and first to get out back into state cash, will be the only winners in the game, and by god they’ve already won big: an acquaintance of mine retired probably years before me, but the dark side of that is eventually others will lose much more, since the whole system is just coutertrade (a negative sum game). It’s all highly regressive.

  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

    1. Joe Blow:
      I think you are dremaing.
      You’ve got it sort of only half right, and therefore pretty much all wrong. A currency proper is not a thing of value in itself, it is a record of credit/debt. It is a numeraire. So gold for example is not a currency. A commodity driven currency is redeemable for gold (or whatever) but the currency is not the gold.

      And you should not confuse “willing to pay for it” with “promise to redeem”. The problem is no one stands ready to redeem a single bitcoin, no one. If someone does arise they’d be insane, it’d be a huge liability, and then you’d see the money price of crypto go to zero pretty fast, no matter what the redeemer promised (gold, water, kisses… they’d go bankrupt fast).

      You are probably correct that crypto is not going away soon, but that’s because of the one sector which demands it, the black market who are not so keen on a numbered Swiss or Caymans Bank account anymore. But this demand does not really fulfill the requirements needed to undermine any state currency. Crypto remains a countertrade token, not a currency. You cannot force a black market dealer to redeem your bitcoin, not unless you own a small army.

      State currencies do not rely on any such social agreement or trust, they are backed by coercive force: the ability of the state to enforce tax liabilities. (I guess you could be pedantic and say that this relies on people trusting the IRS will indeed collect!!! But that would be highly pedantic, and the trust does not really come first, the coercive force comes first). You thus cannot make a state currency go away until your destroy their tax department. That can happen to small banana republics, but it is pretty rare for a nation like the USA or UK.

      Remember Cryto avoids sales taxes, but not many other taxes, so you are probably dreaming that crypto will liberate people. Probably the opposite, since the value of crypto is only that it’s hard to get, so it gets hoarded more than spent, and that completely defeats the purpose of a just monetary system: which is one where people spend most of their income, keeping the currency circulating, which drives industry and commerce and higher standards of living. A currency which primarily is hoarded (like crypto) is highly regressive, and will probably do the opposite of what your desire for a just society, it’ll create a feudal society. Ponder this for a moment, you’ll likely acknowledge I am right. If I am wrong, well… shit, I’d wish you all the best in distributing private crypto equitably to all people once you and your crypto early adopters own most of it.

  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.

    1. Reply to “Lasher FBF”:
      Taleb (If I recall correctly) never trashed blockchain you dolt. Blockchain is just one possible (of many) back-ends for cypto, crypto does not need to use blockchain. Also, blockchain algorithms have several alternative uses not in finance. Another argument, in addition to Taleb’s points, is that crypto tokens are not currencies, they are countertrade tokens, nothing more. (School yourself on this maybe?) Their price is quoted in the currency, not the other way around.

      Taxation is coercive remember, backed by an army. So in what universe do you imagine you will ever see a wise government accepting a private currency in redemption of tax liabilities? There are the unwise, I think Ecuador??? Can’t recall, bu I think one of the Latin American countries might be accepting bitcoin. They are fools. They cannot 100% promise to redeem a bitcoin, so they will in fact undermine their state currency unit, probably trigger a hyperinflation, but that’ll be by their own deliberate choice, not because crypto is a strong currency. Any currency that is hoarded more than spent on real goods is not a strong currency, it is serving the interests of the rich. You’d be going toward feudalism if you fully adopted a private crypto.

  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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