Black swan: An event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict.
Scholar, statistician and prolific essayist, Nassim Nicholas Taleb has made his viewpoint on Bitcoin crystal clear this week. His latest blog post, simply titled "Bitcoin", offers his official stamp of approval, summarizing that the cryptocurrency is an "insurance policy against an Orwellian future".
This article will look at the overlap between Taleb's own fields of study and the numerous domains that Bitcoin occupies, ultimately showcasing Taleb's qualification to rate Bitcoin the way he has.
Taleb is famously known for profiting from the 2008 financial crisis after his multiple warnings fell on deaf ears. In "Bitcoin", Taleb refers to the legacy financial system and all its proponents, including central banks as a "monoculture". This is certainly a key attribute that contributed to the "black swan" event of the US housing market crash during the financial crisis. The 2008 crash is the most commonly cited "black swan" as it is most contemporary and fits the three point definition under Taleb's criteria:
- The event is a surprise to the common observer
- The event incurs a major impact
- The event has "retrospective predictability"
"Retrospective predictability" means to say that in hindsight, the relevant data to prevent or mitigate the occurrence of the black swan event was available, but simply not accounted for. The recommended action in response is to develop and adopt risk mitigation programs that will account for future potentialities.
The "black swan" is only one of multiple concepts that Taleb adopted, but it is the most commonly known one that creates a strong link between Taleb and Bitcoin.
Taleb and Bitcoin
It's not a coincidence that Taleb has taken such an interest in Bitcoin considering that the financial crises of the late 2000s was what catalyzed Bitcoin's development and consequent proliferation. Light reading into Taleb's scholarly background as outlined above shows that there is a major overlap in ideology and values between the man and the censorship resistant store of value.
"Bitcoin" by Taleb will also act as the foreword to "The Bitcoin Standard: The Decentralized Alternative to Central Banking" authored by fellow Lebanese compatriot and staunch Bitcoin maximalist, Saifedean Ammous.
[Bitcoin] fulfills the needs of the complex system, not because it is a cryptocurrency, but precisely because it has no owner, no authority that can decide on its fate. It is owned by the crowd, its users. And it has now a track record of several years, enough for it to be an animal in its own right.
Taleb goes on to specifically cite the non-custodian nature of Bitcoin as its prime advantage over other scarce stores of value such as precious metals.
What other properties does Bitcoin's non-custodian and decentralized nature lead to?
Despite Taleb's limited prior commentary on Bitcoin, he is more familiar than most with the concepts that commonly embody Bitcoin today. Antifragile was a term that Taleb coined, and eventually followed with a book by the same name. Taleb explains his conception of antifragility:
Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better
Bitcoin can be considered antifragile in the sense that with every single "ban", "crackdown" or obituary message, the cryptocurrency grows stronger in response. Every seemingly negative effect pointed towards Bitcoin in fact ensures a stronger defense against the next obstacle.
Skin in the Game
Skin in the Game can be defined as "having incurred monetary risk by being involved in achieving a goal". It's commonly linked to a resolution of the "agency problem", a dilemma within the field of Political Sciences/Economics, and also relevant to Bitcoin (it's becoming increasingly clear that there are few fields that are not somehow linked to Bitcoin).
The "agency problem" details a problematic (and commonplace) scenario whereby decisions are made by an agent on the behalf of someone else (the "principal") while they are motivated to act in their own best interests, oftentimes contrary to that of the principal's interests.
A simple real world example of the "agency problem" would be politicians/bankers (agents) and their own citizens/clients (principal). As Taleb puts it, "When [the agent] is right, he collects large benefits; when he is wrong, others pay the price."
Extending the analogy to Bitcoin, running a full node and holding bitcoins could be considered having "skin in the game".
To expand on the corollary, there are large demographics out there listening to mainstream media or other entities with no skin in the game making forecasts on the price or developmental direction of Bitcoin. In line with Taleb's reasoning, these forecasts only serve to create toxicity and ought to have no bearing on the observer's attitude towards Bitcoin, one direction or the other.
To me, every opinion maker needs to have “skin in the game” in the event of harm caused by reliance on his information or opinion (not having such persons as, say, the people who helped cause the criminal Iraq invasion come out of it completely unscathed). Further, anyone producing a forecast or making an economic analysis needs to have something to lose from it, given that others rely on those forecasts (to repeat, forecasts induce risk taking; they are more toxic to us than any other form of human pollution).
Nassim Nicholas Taleb, Antifragile (2012)
Embodying the concept of skin in the game, Taleb's earlier commentary on Bitcoin was still positive, but limited and cautious:
Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative. But I am not familiar with the specific product to assert whether it is the best potential setup. And we need a long time to establish confidence. I only talk from skin-in-the-game. If I had money in bitcoin, I would have reported it. But I don't yet. I am waiting to understand it better, not with my brain, but with my experience...
The Lindy Effect
The Lindy Effect is commonly cited by Bitcoin maximalists as one of its strongest arguments for continued longevity, with co-founder of the Nakamoto Institute Pierre Rochard being a key advocate as showcased above.
To put it in layman terms, the Lindy Effect details that the longer something (a technology in this case) has been around, the more likely it will stick around. In more technical terms, the Lindy effect is a shorthand reference to Jay Waldemar Lindeberg's Central Limit Theorem: the more time a thing spends near the center of a normal distribution, the more likely it is to remain near the center of the distribution in the future.
How does this apply to Bitcoin?
The Lindy effect holds [with Bitcoin] because the cryptoasset market exhibits continuous extinction pressure on assets and protocols. The mere fact that a protocol or cryptocurrency has survived a meaningful amount of time in a competitive environment is an indication of value. Fragile systems are destroyed with age. Antifragile systems gain from the disorder that accompanies longevity.
It's important to acknowledge that there are certainly objections to the Lindy effect's applicability to Bitcoin. However, in line with the very definition of the Lindy effect, these objections hold less weight with each day that Bitcoin continues to thrive.
"Anytime something just refuses to die, you probably have to pay attention to it".
The above is certainly an over-simplification of Taleb's work, but it reaffirms Bitcoin's increasingly relevant value proposition as a censorship resistant and immutable store of value in today's volatile and unstable world. As detailed in Taleb's blog post, the cryptocurrency ticks a number of boxes targeting highly problematic issues in today's political and socio-economic systems.
Ultimately, if there's someone able to offer a constructive outlook on Bitcoin, at least insofar as it is a political, economic and social instrument, it would be Nassim Nicholas Taleb.
Featured image from Shutterstock
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Editor at Crypto Insider. Likes decentralization, fungibility and BIPs. Dislikes red tape, corporate stuffiness and oxidation