The third world, remittance fees, plant efficiency - demand for Bitcoin still fits a world that is far from ideal

Nassim Nicholas Taleb, the New York University professor who wrote "The Black Swan," has argued that "Bitcoin will ultimately converge to zero dollars." Not long ago he had lavishly praised Bitcoin as "a brilliant idea that surpasses paper money," so his change of heart became bleak news arriving together with the bear market.

Professor Taleb compares Bitcoin with three categories of asset: securities that pay dividends or interest; gold and silver, which pay no dividends but have long been regarded as valuable and have industrial uses; and cash, which is used as a means of transaction.

The expectation of rising prices disappears?

Bitcoin is inferior to securities in that it pays no dividend or interest; it cannot even be compared with gold and silver, which have industrial uses and have been lodged in human memory for ages; and because its price swings it cannot be used for transactions, so it is inferior to cash as well. Up to here, nothing is unfamiliar. It is no more than a summary of the skeptics' criticisms. The core of Professor Taleb's argument is how the price becomes zero dollars.

Bitcoin pours enormous costs into maintaining its ledger - namely, the electricity consumed in mining. All electricity converts into money, and by using the microeconomic principle that "marginal cost equals market price," we can grasp the rough scale of the cost.

For Bitcoin to hold at $30,000, someone must buy the newly issued coins at $30,000. Since 6.25 new coins are issued every 10 minutes, funds capable of buying 900 BTC a day at $30,000 apiece must flow into the Bitcoin ecosystem. Some $27 million a day - roughly 30 billion won - goes to the miners. This is the cost of maintaining the ledger. The reason Bitcoin, which pays no dividend, is holding its price is the expectation that the coin's price will rise.

Now suppose that, for some reason, this expectation disappears. Since it is impossible for the price to rise infinitely, it is only common sense to assume that at some point in the future the expectation of price appreciation will vanish.

Because it is an asset with no dividend, once price appreciation can no longer be expected, investment dries up. That is, the net inflow of capital ceases. With no outside investors to buy the new coins, the price of Bitcoin falls each time new coins are issued. As the price falls, miners' rewards shrink and mining power declines. Yet because new coins keep coming out regardless, the price of Bitcoin keeps falling and miners go bankrupt one after another.

In the end the Bitcoin mining system collapses and Bitcoin loses its price entirely. Here Professor Taleb makes one more bold extension. If Bitcoin investors and miners become convinced that at some future point Bitcoin will certainly be worth zero dollars, then that is realized right now. At the very moment the awakening occurs that Bitcoin's price can never rise forever - for any of various reasons (the discovery of a flaw, replacement by a more advanced technology, and so on) - it becomes zero dollars.

The awakening, then, is only a matter of time, and Bitcoin must inevitably converge to zero dollars. It is a rational and logical conclusion. Bitcoin is a system that can be maintained only if capital flows in continuously from outside (as long as new coins are issued), and for that the price must rise without end. Since it is impossible for the price to rise without end, the inflow of capital stops and Bitcoin has no choice but to slide steeply back down the slope it climbed.

A true Bitcoiner will, at least once before becoming a Bitcoiner in earnest, have run a model much like Professor Taleb's through his head. It is also the decisive intellectual hurdle: fail to clear this wall and you set out on the path of the skeptic rather than the Bitcoiner.

The future will still be full of demand for Bitcoin

First, there is a crypto camp that will welcome Professor Taleb's logic: Ethereum. Because Ethereum is converting to proof of stake (PoS), it does not have to consume the enormous resources Bitcoin does in order to maintain its system. Moreover, staking Ethereum yields a mining dividend, so it also takes on the character of a dividend-paying asset. And because decentralized finance (DeFi) and non-fungible tokens (NFTs) are issued and circulated on the Ethereum platform, the Ethereum platform possesses a certain usefulness. In other words, even if people realize at some future point that the price will no longer rise, the Ethereum platform can survive as a stable ecosystem. It will not fall into the vicious circle in which the disappearance of price-appreciation expectations diminishes the system's capacity.

There is no evidence that Professor Taleb had Ethereum 2.0 in mind when he published his paper. On the contrary, he lumped blockchain as a whole together and criticized it, saying that once you subtract the vague fantasy it has failed to demonstrate any usefulness in the real world. But the logic Professor Taleb deploys works perfectly well as a justification for the transition to Ethereum 2.0. That is, his paper raises an issue that could once again bring to the fore the opposition - running through this ecosystem from its earliest days - between "Bitcoin as a monetary phenomenon" and "blockchain as an innovative technology."

How can Bitcoiners overcome the "wall of extension" that Professor Taleb has raised? Will the investors of a future that has reached the limit of price appreciation still want to own Bitcoin even though the price is not rising? If they do want to own additional Bitcoin even when the price no longer rises, then the Bitcoin that is additionally produced will not push the price down, and there will be no chain of miner bankruptcies either.

To examine Professor Taleb's logic, we can also recast it as a common-sense question: does the Bitcoin ecosystem return to the world outside it a value that justifies a continuous inflow of resources from outside? Professor Taleb built his argument on the assumption that because Bitcoin is not merely unlike any form of asset but inferior to all of them, it is neither legitimate nor rational for the Bitcoin ecosystem to keep absorbing energy from outside. He is in effect declaring that the reason the Bitcoin ecosystem has grown until now is the fantasy that it will produce value in the future, and that there is no possibility this fantasy will be realized.

Why would people want to own Bitcoin - which pays no dividend, has an unstable price, lacks the historicity of gold, and can no longer rise in price? If, at that point in the future, the world were in an ideal state, there might be no reason to own Bitcoin. But it is far more rational to assume that the future, too, will be as far from an ideal state as the world is now.

Even then, some heads of household may need an asset that the border guards cannot take from them, in order to get their families out of a homeland at war. And some producer supplying goods or services to foreign consumers may want to be paid in Bitcoin because the remittance fees and currency-exchange fees are excessively expensive when receiving money through the financial network. Some electric utility may mine Bitcoin - knowing full well the price will fall further - as a way of using surplus electricity to raise the efficiency of its generating plant. Because that is better than throwing the electricity away. In other words, contrary to Professor Taleb's assumption, demand for Bitcoin can be maintained even in a situation where the price no longer appears likely to rise, and in some cases demand can hold up even while the price is falling.

Bitcoin was invented for a world that is not ideal. That is why, despite its many shortcomings as an asset, Bitcoin can be a rational choice for individuals and firms confronting conditions far removed from the ideal. On top of that, it is hard to rule out the possibility that over the considerable period in which the fantasy of an ever-rising Bitcoin price persists, hitherto unknown uses for Bitcoin will also be discovered.

If the world is this far from ideal, the real future awaiting Bitcoin is one in which there is too little Bitcoin to meet all the demand. Which is to say that the limiting condition Professor Taleb presupposes - the point at which the price will never rise again - may never arrive at all.

Not only Professor Taleb: none of us knows enough about Bitcoin to discuss its ultimate future. No - our true ignorance is of this world itself, so very far removed from the ideal state in which Bitcoin exists.

Oh Tae-min, author of "Bitcoin Was Strong" and "The Genealogy of Bitcoin Wisdom"