Not only does bitcoin fail to satisfy the notion of being a currency without a government, but the cryptocurrency is also not a reliable inflation hedge nor a safe haven investment, Nassim Nicholas Taleb, a probability researcher and former quantitative trader, says in a recent paper.
“Few assets in financial history have been more fragile than bitcoin,” Taleb says in a paper titled Bitcoin, Currencies, and Fragility. Transactions in bitcoin are considerably more expensive than wire services, and are much slower than standard commercial systems used by credit cards, making it not an effective currency.
And because bitcoin requires a sustained amount of interest in it, Taleb says it’s worth “exactly zero.” In comparison, “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,” he says.
Throughout its life, bitcoin has maintained “extremely high volatility” of “between 60% and 100% annualized,” the paper reads, implying that it’s too volatile to be a useful currency or store of value.
On the popular belief that bitcoin is a safe haven against financial tail risk, the author notes that during the March 2020 market panic upon the onset of the global pandemic, the price of bitcoin actually dropped farther than the stock market.
And because bitcoin transactions are open for inspection to everyone, transactions are easily traceable, debunking thus the myth that bitcoin can be used effectively to hide one’s assets from the government and act as a protection from tyrannical regimes.
The paper is in opposition with previous statements Taleb had made about bitcoin in the past. In 2017, he wrote the foreword to The Bitcoin Standard, a book by economist Saifedean Ammous, which makes the case of a “decentralized alternative to central banking.”
Back then, Taleb called bitcoin “the first organic currency,” championing the fact that it’s “owned by the crowd” and “gives us, the crowd, an insurance policy against an Orwellian future.”
Analysts and industry observers have sounded the alarm on bitcoin after the cryptocurrency soared to multiple all-time highs in Q4 2020 and H1 2021, crossing US$63,000 in April 2021. Bitcoin posted a price return of 103% in Q1 2021 alone, according to the CoinGecko Q1 2021 Quarterly Cryptocurrency Report.
But since reaching its peak, bitcoin has slumped, losing more than 50% of its value since April 2021. This came on the back of after public statements by Elon Musk and the announcement of a ban for financial institutions and payment companies from providing cryptocurrency services in China.
Veteran fund manager David Tice urged investors to stay vigilant in the cryptocurrency space amid these highly volatile times, telling CNBC’s Trading Nation on July 16: “We had a bitcoin position when bitcoin was at US$10,000. However, when it got to US$60,000 we felt like that was long in the tooth.”
He noted that there has been a lot of uproar and negative statements from organizations including central banks and the Bank for International Settlements (BIS) on cryptocurrencies lately, stating that “it’s very dangerous to hold today.”
Recent research by the BIS found that cryptocurrencies are not sought as an alternative to fiat currencies or regulated finance, but instead are a niche digital speculation object.
The paper calls for a regulatory and supervisory framework for cryptocurrency markets since “the objectives of [crypto] investors are the same as those for other asset classes, so should be the regulation.”
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