Cryptocurrency reliability as assets
Lately upon problems with the Tether and statement from the Jamie Dimon, JP Morgan CEO, calling Bitcoin “worthless”, doubts raised again about cryptocurrency market. Everyone who is familiar with this market knows the high volatility of it. $400B wiped out of the Bitcoin market less than two months ago while it wasn’t amongst most popular crashes.
Famous statistician and former option trader, Nassim Taleb, has written a paper on Bitcoin, Currencies, and Fragility and states that Bitcoin is worth exactly zero. He argues that “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.” thus there’s a big risk in which Bitcoin is worth actually zero.
He is the author of The Black Swan: The Impact of the Highly Improbable which is one part of the Incerto series. One of the main themes in this series is providing empirical and historical evidences on how people overlook events that they haven’t seen yet. So if you have read his books and the proof in his Bitcoin paper, you may get convinced that Bitcoin is NOT a rational decision for investment, especially for the long-term.
Despite the respect I have for Taleb personally and admiring their work in Universa, I see two characteristics about Bitcoin which convince me oppositely: 1) New tools and platforms that enable faster structural changes 2) Bitcoin as a collectable.
From the introduction of Bitcoin till now a whole industry, however small or big, has been shaped around it and new innovations and criticism only tried to make it better and resolve more issues with it (here and here).
We shouldn’t mistake high-volatility as enough reason to mark Bitcoin with 0 value. There’s no other kind of asset with more open ecosystem around, as cryptocurrencies. The more you’re open, the more you’ll get influenced by new connections, which explains the high-volatility. Imagine if IBM stocks could be traded without any KYC, no age limit, in all counties by all sophisticated traders, to teachers, software developers, students, retailers and also by terrorists, money launderers through nearly smart phones and devices connected to the Internet around the world 24/7.. Wouldn’t we expect crazier volatility on its price?
This new kind of “openness” and high-volatility, has also an advantage over traditional financial ecosystems. This ecosystem is ready for drastic falls. This is the difference with other asset classes. I see this ecosystem, in case of Bitcoin reaching to the 0 value, is prepared to quickly move to another definition of cryptocurrency that eliminates whatever reason that has made Bitcoin price to 0. This new ability to adapt makes Bitcoin different from other assets that we’ve priced before.
Taleb uses the Cumulative Ruin principle : “If any non-dividend yielding asset has the tiniest probability of hitting an absorbing barrier (causing its value to become 0), then its present value must be 0.” This principle can be applied to monetary policies while designing a currency structure in economic terms where lots of other parameters are being considered especially in issuing new currency bills.
Unlike Taleb’s way of valuing Bitcoin with standard valuation framework for currencies, I see Bitcoin as a robust technology that the tech community had came up to address online payment (which HTTP failed to do ) and enables countless actions online which is very different than traditional currency definition in economics.
When we are changing the underlying assumptions of the problem, from economic concerns to technology providers’ concerns, the valuation (evaluation) method for sanity checking the solutions (currencies vs. crypto) also changes. It’s like if want to argue that cars are less reliable relatively to horses for transportation, we say that “horses don’t need a mechanic-driver to take you from one place to another.” We should evaluate Bitcoin with new pricing methods and principles. Which brings us to the next Bitcoin characteristic.
Taleb continues his argument with Bitcoin not being a collectible vs gold being one. This also is not true. Firstly the initial launch of Bitcoin showed that people had actually used it as collectible when no one believed that it bears any value. In later years Bitcoin gained value and exchanges came up. Secondly NFTs that are being insanely popular has the exact physical/data structure as Bitcoin as NFT being stored in a blockchain wallet and are being traded only because in essence they are collectible items, nothing more. So, as Taleb itself states, collectibles are exceptions from the Cumulative Ruin principle, this principle again doesn’t apply to Bitcoin.
I see our ability to change faster and also considering Bitcoin as a collectable, draw a minimum bar of price higher than 0 for Bitcoin and a much higher bar for the blockchain industry.
I still believe that there is much higher risk in long-term investing in Bitcoin vs stock market and I also see myself agreeing with the fallacies at the end of the Taleb’s paper. But I see it’s possible that Bitcoin started with a purpose but now it’s on a different path. If you get right tools and strategy for this new kind of asset or new financial services, you can use cryptocurrencies for investment and or provide services with it.
Interesting links
Flexport’s CEO fixing a supply chain crisis in a tweeter thread:
AI continues to grow into content creation, not just in text : https://www.vizcom.co/
As I read reinforcement learning papers, still the DeepMind work beats other models. Despite being resource-intensive, the ability to expand agents ability from solving simple tasks to more complex ones without human interaction is remarkable: https://deepmind.com/blog/article/generally-capable-agents-emerge-from-open-ended-play
This is the most interesting NFT project I’ve seen : https://www.lootproject.com/
read more about loot here: