Taleb Says Bitcoin "Is Not Supposed to Be Volatile." Here's Why He's Wrong.


While institutional endorsements of Bitcoin have spiked in recent weeks, especially following Elon Musk's coming out as a "supporter of Bitcoin" and Tesla's $1.5 billion purchase, one man has chosen to venture in the opposite direction: earlier this week, scholar and statistician Nassim Nicholas Taleb announced on Twitter that he had been "getting rid" of his bitcoin—for a couple of reasons, but one in particular: he found it too volatile.

His reasoning came as a bit of a surprise to many, seeing as Bitcoin's volatility likely benefited Taleb in the last few months: this year alone, Bitcoin has so far recorded a price gain of almost 70 percent.

Yet that is exactly the issue, according to Taleb, who claimed that "a currency is never supposed to be more volatile than what you buy & sell with it. You can't price goods in BTC."

In that regard, he called Bitcoin "a failure (at least for now)" that had been "taken over by Covid denying sociopaths [with] the sophistication of amoebas."

If we disregard the rather questionable assumption that Bitcoin is now mainly used by “idiots,” it still leaves Taleb's conviction that Bitcoin is far too volatile. More specifically, he believes Bitcoin "is not supposed to be volatile at higher prices," as he elaborated in a later tweet.

That's categorically wrong, and anybody who acquires bitcoin thinking it will soon stop being volatile is likely in for a surprise.

Bitcoin Is Supposed to Be Volatile

Taleb is right in saying that Bitcoin is volatile—but expecting anything else at this point in time would be highly unrealistic and borderline delusional. Bitcoin is subject to constant price fluctuation as it is traded on exchanges around the world, around the clock. When people are willing to pay more for it, the price goes up; when they’re willing to pay less, it goes down. With Bitcoin, these fluctuations have historically shown to be more extreme than for other markets. That’s due to a few reasons.

Bitcoin Is the Last Bastion of a Free Market—And Free Markets Are Volatile

If the GameStop saga has taught us anything, it’s that free markets don't exist when it comes to stock trading. Robinhood's infamous restriction of GameStop (GME) buy orders last month, citing "market volatility," highlighted the control financial intermediaries exert over the stock market, essentially nipping natural price discovery in the bud.

Even during everyday stock exchange operations, trading halts are far from uncommon. Most exchanges have so-called "circuit breakers" in place that are triggered under certain conditions. High volatility is one such condition, as exchanges will often stop trading for several minutes when a stock experiences unusual price fluctuations.

None of these measures are in place with Bitcoin, which trades 24/7 without volatility-based trading halts.

Bitcoin's Market Cap Is Tiny

While it’s approaching the $1 trillion mark in big steps, Bitcoin's market capitalization, when compared to the world's financial assets, is still really small. It's currently around 7.5 percent the size of gold's market cap, a factor increasingly considered by institutional Bitcoin proponents when it comes to anticipating Bitcoin's future price potential.

Bitcoin is by far the most liquid cryptocurrency, but its liquidity is way lower than that of many traditional assets. Large purchases have the potential to move the market, especially when placed on exchanges with lower liquidity. As Bitcoin's market cap expands at the hand of a growing number of long-term investors, this volatility will subside to an extent.

Volatility Is Not a Bad Thing

Most of the aforementioned points are directly related to the fact that Bitcoin is a nascent asset class. It grew from literally zero to over $800 billion in market capitalization over the span of 12 years—organically, without centralized direction or artificial intervention. That in itself is a major achievement which is yet to be replicated. 

Such developments don't happen in a linear fashion, and that's not necessarily a bad thing. 

Whereas assets and currencies whose volatility is kept artificially low easily cause anxiety among their holders in the event of any larger deviation, volatility is known to be a part of Bitcoin, and large short-term spikes and drops don't surprise anyone who has been in the game for some time. In fact, a popular view comes from no other than Taleb himself, who discussed the topic of volatility in his book "Antifragile" in 2012:

When a currency never varies, a slight, very slight move makes people believe that the world is ending. Injecting some confusion stabilizes the system. Indeed, confusing people a little bit is beneficial – it is good for you and good for them. For an application of the point in daily life, imagine someone extremely punctual and predictable who comes home at exactly six o’clock every day for fifteen years. You can use his arrival to set your watch. The fellow will cause his family anxiety if he is barely a few minutes late. Someone with a slightly more volatile – hence unpredictable – schedule, with say, a half-hour variation, won’t do so.

Bitcoin Is Volatile—Get Used to It

Bitcoin will probably always be somewhat volatile. It will fluctuate more than fiat currencies, which are centrally controlled and uncontrollably inflated.

Eventually, there will be a large number of long-term HODLers, individuals and institutions that don't buy in because of a headline or out of FOMO, but following a conscious decision to store value in Bitcoin. We are watching the beginnings of this trend unfold in real-time, as large investors increasingly liken Bitcoin to gold and describe it as a hedge against inflation. MicroStrategy CEO Michael Saylor famously plans to hold the firm's 70,000 bitcoin "for a hundred years."

This will lower Bitcoin's volatility over time—it just doesn't happen over the course of 12 years.

In his latest tweet on the topic, a response to Kraken's Head of Growth Dan Held, Taleb compared Bitcoin's fluctuations to those of gold. As he pointed out, gold has exhibited much lower volatility than Bitcoin over the last decade—a well-known fact and also little surprising for a millennia-old asset. It appears, however, as though Taleb might have forgotten why this is of little relevance in the first place, as Bitcoin addresses an issue that gold, no matter how stable in comparison, cannot solve. In his foreword to Saifedean Ammous's Bitcoin Standard, Taleb put it this way:

Bitcoin is a currency without a government. But, one may ask, didn’t we have gold, silver and other metals, another class of currencies without a government? Not quite. [...] Banks control the custodian game and governments control banks (or, rather, bankers and government officials are, to be polite, tight together). So Bitcoin has a huge advantage over gold in transactions: clearance does not require a specific custodian. No government can control what code you have in your head.

At the end of the day, Bitcoin's volatility is a byproduct of its evolution into a dominant asset class. Bitcoin is about far more than its daily, weekly, or even yearly fluctuations. It's about a fundamental shift away from a debt-based economy to a savings-based economy. It's about the liberation of money from the total control of a small number of self-serving centralized rulers. It's about the individual's ability to reclaim their financial freedom—not by getting wealthy, but by making use of their right not to have their savings inflated away and their money used against them as a surveillance tool.

And yet again, it was Taleb himself who worded it almost perfectly:

[Bitcoin's] mere existence is an insurance policy that will remind governments that the last object establishment could control, namely, the currency, is no longer their monopoly. This gives us, the crowd, an insurance policy against an Orwellian future.

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Lina is an editor and managing director at the BTC Times. She enjoys writing about Bitcoin and financial sovereignty.