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'Few assets have been more fragile than bitcoin' - Taleb

Kitco News

Bitcoin's many flaws makes it incapable of functioning as a currency, said Nassim Nicholas Taleb in a recently published paper.

His paper is titled Bitcoin, Currencies, and Fragility. Taleb was the celebrated author of The Black Swan: The Impact of the Highly Improbable.

Taleb argues that Bitcoin has failed at being a currency beyond government partly due to bitcoin's huge swings in value.

"There is a conflation between 'accepting bitcoin for payments' and pricing goods in bitcoin. To 'price' in bitcoin, bitcoin the price must be fixed, with a conversion into fiat floating, rather than the reverse," writes Taleb.

He writes that bitcoin champions conflate the success of payment mechanisms and decentralized modes of exchange. Bitcoin is just too removed, argues Taleb. Fiat currencies are deeply wedded to our economy and the way we live our lives.

"For an employer to pay a salary fixed in bitcoin, she or he must be getting revenues fixed in bitcoin. Furthermore, for the vendor to offer a can of beer in fixed bitcoins, she or he must be paying for the raw material, and have the overhead fixed in bitcoin. The same applies to the mismatch of assets and obligations on a balance sheet. All this requires a parity in bitcoin-USD of low enough volatility to be tolerable and for variations to remain inconsequential," writes Taleb.

Gold is tangible and physical, which partly sustains its value, but bitcoin has a "path dependence problem."

"We cannot expect a book entry on a ledger that requires active maintenance by interested and incentivized people to keep its physical presence, a condition for monetary value, for any period of time — and of course we are not sure of the interests, mindsets, and preferences of future generations. Once bitcoin drops below a certain threshold, it may hit an absorbing barrier and stays at 0 — gold on the other hand is not path dependent in its physical properties."

Precious metals also have 1,000 of years of tradition to fall back on.

"Few assets in financial history have been more fragile than bitcoin," writes Taleb. "[Bitcoin] can be neither a short nor long term store of value (its expected value is no higher than 0), cannot operate as a reliable inflation hedge, and, worst of all, does not constitute, not even remotely, a safe haven for one’s investments, a shield against government tyranny, or a tail protection vehicle for catastrophic episodes."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.