How risky is it to invest in digital assets? The ongoing rout in the crypto markets is bound to renew that debate.
This is not just a question for individuals and money managers, but also for national legislators, who are trying to figure out how much protection to offer to retail investors.
Reading: Nassim taleb bitcoin
The easier it is for small investors to put money into bitcoin and other cryptocurrencies, the more Americans will have access to investments that have made some people quite a bit of money, but the more they are exposed to the uncertainties of one type of asset entirely. novel and highly volatile.
This year, much of the political debate has centered around the idea of spot bitcoin etfs. Several large asset management firms have applied to the SEC for permission to list such funds, which would invest directly in bitcoin and could be bought or sold just as easily as publicly traded stocks. But so far, the SEC has rejected those offers, citing a lack of regulation in the market and “the potential for fraud and manipulation.”
The debate took on a new dimension last month when fidelity investments, one of the world’s largest asset managers, announced that it would soon allow participants in its 401(k) plans to invest part of their retirement savings in bitcoin. on Wednesday, that led to sens. elizabeth warren, d-mass., and tina smith, d-minn., to send fidelity a letter challenging the decision, pointing to the career counseling department warning of Such a move risks her questioning whether fidelity’s other activities (it has dabbled in crypto mining and offers crypto investments to institutional investors) create a conflict of interest.
The issue is the extent to which cryptocurrencies will be invited into the mainstream of the investment world right now. Retirement accounts represent huge pools of investment capital that could boost crypto markets, but they are also among the most “vanilla” investment products out there, highly accessible and also strictly regulated for consumer protection. they’re not meant to be easy parties to break.
Getting to the heart of the matter, the question here is whether people who invest in bitcoin are going to be, to put it politely, hosed down.
so now seems like a good time to see a lively internal debate about the real value of bitcoin.
As it happens, fidelity’s digital assets group has been one of the most prominent proponents of the view that bitcoin, in particular, is extremely valuable. outspoken risk analyst nassim nicholas taleb has been one of the most prominent promoters of the view that it is not.
That’s why I was struck by a short section titled “the lindy effect and bitcoin’s antifragile qualities” in the middle of a recent 25-page fidelity digital assets article.
the January paper sets out the view that bitcoin is superior to other digital assets. this particular section argues that bitcoin’s longevity compared to other cryptocurrencies makes it “lindy”, or likely to last, and that the various shocks bitcoin has endured (price drops, exchange trades, etc.) have made it make the network stronger and actively resilient. demonstrating its “anti-fragility”.
What the report doesn’t say is that both the “lindy effect” and antifragility are pet concepts of taleb, who shot to global fame when his 2007 book “black swan” warned of the need to prepare for catastrophic situations. , unpredictable risks just as the global financial crisis unfolded.
fidelity’s use of those concepts was surprising because last summer, taleb made a splash in crypto circles with an article of his own. he argues that bitcoin is a bubble and purports to show that its true value is, bluntly, “0”.
That one of the world’s largest asset managers and one of the biggest intellectual celebrities in finance have issued mourning manifestos tells you everything you need to know about why bitcoin is so controversial and so puzzling even to experts .
Bitcoin proponents tend to act like it’s a solid investment (of course, this is the wave of the future), while skeptics tend to act like it’s a flashing red light (of of course an unbacked virtual “currency” is just a scheme).
The fidelity debate offers a window into why it’s so hard to know the answer.
taleb is the rare prominent figure who showed initial enthusiasm for bitcoin before concluding that it was nonsense in said article, which he published on arxiv.org, an online repository of scholarly articles.
Fidelity, based in boston, is the kind of place where doctors and lawyers stash their retirement savings. It’s not associated with the arrogance of maverick hedge fund managers, let alone the online disruptive spirit of crypto, but the firm moved into crypto earlier than other giants, in 2018, when it established its asset group. digital.
Without naming taleb, the lindy section of fidelity’s report chides him by resorting to his own pet concepts to bolster his case for bitcoin’s value.
In his article, taleb argues that bitcoin’s price is too volatile to function as a currency and that competition between fiat currencies alongside traditional financial instruments provides enough opportunities to hedge against inflation. he also argues that for bitcoin to have any value now, it must be immune to any chance of it succumbing to hacking or other attacks at some point in the future, but it’s impossible to rule out that some vulnerability might be discovered. he concludes that the blockchain is an ingenious invention with little practical value, and that bitcoin amounts to a “no-revenue bubble.”
taleb also invokes his favorite concept of “lindy” to refute the idea that bitcoin is like digital gold: precious metals like gold have been valuable for millennia, so according to lindy’s law, we can expect May they remain valuable for centuries to come. on the other hand, bitcoin as a new technology is likely to be superseded by newer technology.
Fidelity’s article appropriates this idea in the service of its own point of view. The document takes for granted that digital assets are valuable, noting that by digital asset standards, bitcoin is the best option since it was invented first and still exists. things happen fast in the world of cryptocurrencies: thousands have been launched in several years and the vast majority have been abject failures. so, by cryptocurrency standards, bitcoin is lindy, though that may mean little in the span of human history.
the fidelity document also lists a dozen attacks and shocks bitcoin has survived to date, arguing that the network is “anti-fragile”, also the title of a 2012 book by taleb, which he cites in his article anti bitcoin. it has sufficiently demonstrated that it will remain robust against future shocks.
in the months since taleb’s manifesto was first published, bitcoin roughly doubled, before losing all of those gains, and then some, but the lack of a true crash seems like a point in fidelity’s favor . in fact, the cryptocurrency’s market price has dropped 80 percent or more three times, only to bounce back.
The fact that inflation has remained elevated while bitcoin’s price has plummeted seems a point in taleb’s favor, whose article casts doubt on its value as a hedge against rising price levels.
Before the recent feud over fidelity 401(k) plans, I asked both sides about their opposing views.
The authors of the fidelity article, chris kuiper and jack neureuter, assured me that their use of antifragile and lindy was not intended as a response to taleb. they swore they weren’t, as he suspected, “trolling”, although they were certainly familiar with his white paper. Kuiper mentioned that people in bitcoin circles had started calling the sad document “the black paper”.
taleb told me he hadn’t seen the fidelity article, but said he didn’t believe the antifragility argument. “If I had a dollar for every time someone told me that something is antifragile and it isn’t,” he told her, “I could own all the shares of bitcoin.”
he also does not accept the argument that bitcoin is lindy. “Techno-utopianism is not lindy,” he said. “neo-mania is the exact opposite of lindy.”
taleb said he is also not an apologist for the existing banking system. He confided that he is working on an article on the shortcomings of custodial banking, but declined to predict when he would publish it.
Meanwhile, rhetorical volleys about the value of bitcoin will continue to rebound from here, and our expectations about who will discuss where and how will continually be challenged. That’s because cryptocurrencies defy easy categorization, and our old categories don’t always hold up well in the new online spaces we increasingly inhabit.
- >spins you can get kicked out of the metaverse for playing the ball.
- the treasury department is sanctioning a service that helped north korean hackers hide your footprints .
- sen. kirsten gillibrand and the crypto industry are unlikely, but increasingly close allies.
- crypto-skeptic economist nouriel roubini is helping develop a digital dollar.
stay in touch with the whole team: ben schreckinger ([email protected]); derek robertson ([email protected]); konstantin kakaes ([email protected]); and heidi vogt ([email protected]).
ben schreckinger covers technology, finance and politics for politico; he is an investor in cryptocurrencies.
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See also: The Game Theory of Cryptocurrency