Recently I re-read Taleb’s paper and decided to revisit some of the notes I wrote at the time it came out (roughly 2 years ago). I’m reposting and updating these notes as I find that revisiting and rethinking about these matters tends to clarify a lot of my thinking and polish my framework for analyzing cryptocurrencies. I hope the reader will enjoy.

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A crucial aspect of Taleb’s anti-BTC argument revolves around the fact that BTC displays high volatility even at higher market caps.

However, I find a fundamental flaw in his reasoning. Drawing from my experience as a short-term trader and investor, I’ve noticed that retail-driven stocks tend to exhibit more volatility and inefficiency compared to institutionally-driven stocks (think GME vs AMZN). As of now, BTC primarily operates within a retail-driven market, with estimates suggesting that only 10% of BTC is owned by institutions(according to Bridgewater and Coindesk), and retail investors have access to substantial leverage in certain CEXs and DEXs.

I predict that the volatility that Taleb is concerned about will diminish as institutions occupy a larger share of the market and daily liquidity. While the volatility may not necessarily drop to 20% (levels similar to gold), it will likely alter the relationship Taleb is worried about in his charts.

This belief is grounded in several factors:

• Institutions often engage in rebalancing, strategically selling on the way up and buying on the way down.
• Institutions, unlike retail traders, are not as emotionally driven, displaying greater discipline in their trading behaviors. While exceptions exist, in my experience this tends to be the case as a group.
• Mandates, both explicit and effective, limit the percentage of crypto that many institutions can own, preventing excessive exposure. Any normal hedge fund reporting a 30% exposure to crypto is likely to face a surge in withdraws. If a fund have a substantial profit in a crypto position, they are often forced to rebalance back down.
• Drawdown limits imposed by most hedge funds, lead to reasonably sized positions, and mitigate emotionally-driven moves common among retail traders.
• Institutions tend to rely on historical and statistical analyses, making more informed decisions and reducing the likelihood of buying at market tops and selling at bottoms.

Taleb’s impatience is evident; he wants to witness this shift within his specified timeframe. However, the market operates independently of his expectations, and change may happen over the next 5-10 years rather than conforming to Taleb’s desired timeline.

Moreover, despite increasing volatility and BTC adoption, institutional investors, who have entered the market in the past year, have not shown signs of abandoning BTC as a reserve asset.

Also the Crypto Punk NFT phenomenon challenges Taleb’s claim that BTC lacks utility, especially when compared to gold, which can be used as jewelry.

Crypto Punks serve as signals of wealth and status within the crypto community, akin to traditional status symbols like Picasso paintings or luxury cars. Similarly, BTC, limited in supply with a widely known price, holds its own status as a recognizable investment. Unlike NFTs, BTC is easily fractionalized, allowing for broader ownership. However, fractional ownership of NFTs like Punks may not confer the same level of status, if anything its a sign that the person can’t afford a full one.

With BTC, people generally prefer owning a “full” BTC (reddit is often obssesed with the idea of being a “full coiner”) to be part of the larger narrative, displaying their status on social media by endorsing bitcoin. If someone is constantly talking about bitcoin, displaying its logo, and promoting it, its implict that they have a significant amount of exposure to the asset, leading lots of people to conclude that they own a good amount of this widely reconignized asset with a well known public price, that is a display of status similar to a cryptopunk owner changing their profile picture to the image of their NFT.

Taleb argues that you can wear gold in the form of jewlery but you wouldnt be able to do so with BTC, but that is not true, the way you “wear” BTC is by talking about it, displaying your affection and admiration for it, wearing hats/shirts, posting AI created images with the logo, etc. In essence, communicating that you own this asset that everybody knows cost a lot of money. That’s how they would communicate that they own a Picasso as well (since it would be impractical to carry it around), through words and images. Ironically, Taleb tends to block these same people claiming they are idiots, this makes it challenging for him to make the connection that you “wear” bitcoin through social communication instead of jewlery use.

In essence, BTC appears more as a highly liquid and transferable rare item than a traditional currency. While Ethereum (ETH) has digital layers cementing its role as a currency, BTC seems to function more as a globally distributed, highly sought-after collectible.

BTC, with its 21 million units, can be seen as the original crypto NFT, that was fractionalized but has a small float compared to its target market. And its investors want to own and accumulate as many full units as possible to build as large a collection as possible (Gotta Catch ‘Em All) and then display their position to the world in order to flex it (think Michael Saylor, who seems to be in a new podcast every week). This is what I call the “collectible model” for analyzing cryptocurrency. Let me use the example of Bitcoin Satoshi Vision in order to show how this model is much better to explain and guide someone in this space:

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Bitcoin Satoshi Vision (a fork of Bitcoin) is intriguing because it sheds light on the apparent irrelevance of 51% attacks against a network (Bitcoin Gold, BTG, could also be included in this category). Despite numerous attacks, many exchanges still accept BSV as deposit, but demand a significant number of confirmations to credit BSV. Typically between 20-100, even though BSV is a fork of the original Bitcoin code.

Let’s explore various models to understand why Bitcoin SV maintains a market value of $1.9 billion (as of January of 2024), surpassing the value of entire companies:

1. Currency Model: In this model, a currency’s value correlates with its utility and stability. However, BSV lacks practical use as a currency due to the extensive confirmation requirements. The extended waiting period makes it less functional than many other alternatives, and there’s no development of a Lightning Network for this coin. According to this model, the $1.9 billion valuation seems nonsensical, leading some to label it as a ‘bubble.’ Yet, these so-called ‘bubbles’ keep persisting over time.
2. Technology Model: Bitcoin Satoshi Vision technology is deemed subpar, consistently facing attacks. It lacks security, permits transaction censorship, and poses the risk of miners executing double spends. There are superior technologies available, such as Bitcoin, Bitcoin Cash, and Litecoin, which have proven more resilient over time. Despite these drawbacks, the technology model fails to explain BSV market cap and lasting value, inevitably prompting the ‘bubble’ assertion, which has historically proven inaccurate.
3. Bubble Model: This model, often unreliable in predicting the future, resembles astrology more than a practical analytical tool.
4. Collectible Model: Bitcoin Satoshi vision emerges as a collectible for those who appreciate the purist concept to having Bitcoin be exactly what it was outlined in the whitepaper with no deviations allowed (so updates like Segwit wouldn’t be accepted), in addition to supposedly being run by Satoshi himself. The focus shifts from efficiency of transactions to just being in the ledger, wherein being part of the ledger implies participation in hoarding this historical collectible. 51% attacks have limited impact, as they can only undo a fraction of blocks. Individuals can buy and hoard Bitcoin Satoshi Vision, feeling connected to Satoshi’s legacy, considering themselves special contributors to history and important participants in the greater good (even if they are mistaken).

This collectible model proves more useful than previous frameworks, providing clarity on Bitcoin Satoshi Vision market dynamics. The emphasis on hoarding as a form of participation in a historical legacy aligns with its enduring value, offering a fresh perspective on its existance.

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Additionally, Taleb’s argument against BTC, emphasizing its dependency on active miners and potential future obsolescence, parallels similar challenges faced by traditional collectibles such as rare comic books, rare paintings, or other artifacts stored in museums. These collectibles demand careful preservation to maintain their value, just as Bitcoin’s decentralized network relies on miners and node operators for its security and maintanence. Its no wonder why large holders of bitcoin like Galaxy Digital own and operate mining pools, they are taking care of their collectible just like a Museum would of its pantings.

In conclusion, understanding BTC as a collectible, akin to traditional rare items, provides a more comprehensive model than the currency or technology-focused perspectives. BTC’s enduring value lies in its historical significance, scarcity, and the desire for individuals to be part of a breakthrough technology, contributing to the broader human need for recognition, admiration, and a sense of uniqueness. This perspective challenges Taleb’s criticisms and offers a more nuanced understanding of BTC’s role in the evolving landscape of digital assets.

-Nando