Here's Why Nassim Nicholas Taleb Called Bitcoin a 'Malignant Tumor'

The Black Swan author says Bitcoin is part of a Disney-esque asset bubble, amongst other things.

Black Swan author Nassim Nicholas Taleb lashed out at Bitcoin (BTC) in a recent interview. The well-known risk analyst compared the leading cryptocurrency to "malignant tumors" and said it’s a "magnet for idiots."

Credited with predicting the 2007/2008 financial crisis, Taleb, who writes about probability and risk, was once a fan of Bitcoin. He thought it could offer an alternative to centralized monetary policy at a time when he didn't agree with the Fed's decisions. But as time went on, he lost faith, as he explained in a recent interview with L'Express in France.

Here are some of the reasons he now compares Bitcoin to cancer.

1. It doesn't work as a currency

Taleb says that Bitcoin hasn't managed to become a "currency without government," in spite of the hype. He points out that it doesn't work as a store of value or guard against inflation -- two common selling points we hear from Bitcoin advocates. "Worse than anything," he says, "It does not remotely constitute a shield against government tyranny or a vehicle to protect against catastrophic episodes."

There are a lot of arguments around whether Bitcoin works as a currency. On the one hand, it's extremely volatile. If you're using Bitcoin to pay salaries or pay your rent, it becomes problematic if it gains or loses 50% of its value in a short space of time. It's also relatively slow in processing transactions and transaction fees can be expensive.

On the other, Bitcoin fans believe it could become the currency of the internet, or function as a form of digital gold, and say there are tech solutions that will reduce transaction times and costs. It's also been adopted by countries like El Salvador and the Central African Republic as legal tender (though there are questions about how successful those moves actually were.)

2. It's part of a Disneyland-eque asset bubble

Taleb believes the low interest rates we've seen in the past 15 years have distorted the way we see investments. "Lowering rates creates asset bubbles without necessarily helping the economy," he argues. According to Taleb, Bitcoin has flourished in a speculative environment where people have lost any sense of what long-term investments really are. He goes further, claiming that young Bitcoiners do not understand finance. He says some young people who bought Bitcoin early "got temporarily rich without knowing anything except computer programming."

3. It attracts scammers

The idea that crypto is a hotbed for fraudulent activity is nothing new. Even Coinbase CEO Brian Armstrong said last year that the industry was suffering a black eye because of the numbers of fraudsters involved. Taleb says, "I think the crypto universe attracts manipulators and scammers."

Bitcoin fans would argue it's not fair to slam the entire crypto industry just because Bitcoin has been used by bad actors -- in the same way that you can't you couldn't criticize the U.S. dollar because some criminals use it. Scammers have used crypto just as they would use any new technology where there are high expectations and a relatively low knowledge base. That said, the lack of regulation in terms of the functioning of individual cryptocurrencies and trading on crypto exchanges has opened the door to a disproportionate number of bad actors.

Is he right?

Many crypto investors have seen the value of their portfolios drop significantly in the past year, particularly those who bought for the first time during the frenzy of 2020/2021. It isn't surprising that some people regret their crypto purchases and wonder if Bitcoin still has long-term potential.

The difficulty is that nobody knows for sure. Taleb raises important questions about Bitcoin's utility, which is fundamental to its ability to do well in the coming 10 or 20 years. But the idea that it's an asset bubble or that it has attracted scammers doesn't necessarily rule out an eventual recovery.

Investors like Ark Invest's Cathie Wood still believe Bitcoin could reach $1 million by 2030. Ark cites several industries where it could take a portion of the market -- such as the international remittance market or working as a currency in emerging markets. But it's impossible to guess at the impact of increased regulation. Regulation is just one of several hurdles that crypto needs to cross. For example, right now, crypto isn't that easy to use, which stops it reaching new users.

One thing is clear. Bitcoin remains a high-risk investment and it is important to listen to critics like Taleb as well as advocates like Wood. If you do decide to buy Bitcoin, make sure it only makes up a small percentage of your portfolio. If you only invest money you can afford to lose in high-risk assets like crypto, you won't be knocked off course financially if they eventually fail.