Bitcoin value and small probability / high impact arguments

by vbuterin 3 min read31st Mar 201550 comments


I had a rather fun debate with people from the always cynical r/buttcoin reddit community, discussing my estimation of the expected value of Bitcoin in the future, which was predicated on what I estimated as a 5% probability that it will displace part of gold due to its superior properties in the store-of-value realm:

Note that I am certainly not a Bitcoin maximalist or ideologue; I've become quite a bit more skeptical lately and am actually much closer to the "currency meh, blockchain cool" perspective that is becoming pretty mainstream in the parts of the broader IT and finance community that I've spent the most time interacting with. Here I ended up articulating and defending a position I actually disagree with in any reasonable sense of the term "disagree"; the debate is entirely on whether the probability of the position being correct is 5% (my view) or 0.0000000005% (what seems like their view).

I'd like to ask this community, to what extent are my position and my arguments correct? I'm interested first in a few object-level issues:

1. Gold is a Veblen good both in its store-of-value and its aesthetic use cases. If gold was not rare, people would not care about it for jewellery purposes, as plenty of other forms of jewellery exist with a better aesthetics-to-cost ratio. Gold's premium over other pretty things is purely a result of status/prestige considerations. Hence, the "floor" to which gold could fall due to a simple equilibrium flip is very low (perhaps $50 from industrial use). So Bitcoin's lack of a "fundamental use value" floor is not a serious disadvantage of Bitcoin against gold.

2. A $100 price floor is 90% as bad as a $0 floor. To see why, note that you can make the custom asset of { 9 parts BTC, 1 part oil } which has a pretty identical ratio of current price to price-floor-from-fundamental-use-value.

3. The probabilities of the various events required for BTC to receive this status are roughly within an order of magnitude of the 5% mark.

4. There is a long-term risk to black swan supply increases in gold due to any of { space mining, nanotech-enabled ultracheap earth mining, nuclear transmutation }; this does not exist for BTC

And also particularly in one very important meta-level issue: is my expected-value estimation (10% of gold market cap = $700b = $34000 per BTC * 0.05 chance = $1700 per BTC EV; the fact that the BTC price probability distribution is a power law and not a square increases this in practice but I do not count that in order to give myself a safety factor) a good way of making estimates in these kinds of scenarios? Many commenters argued that 5% is far too high, and offered the justification that I was putting BTC in a much more privileged reference class than would be rational, and so I offered some counter-arguments for why it deserved a privileged position from an outside view in a much more significant way than Random Joe walking up to you saying "invest $10000 in my company! Look at the $700b market and if I only get as little as 1% you'll be rich!" would not (namely, because there are a million entities at least as salient as Random Joe in the world making similar claims, Random Joe would deserve a prior of at most 1/1000000, whereas BTC's reference class is much smaller).

Is my general line of reasoning correct here, and is the style of reasoning a good style in the general case? I am aware that Eliezer raises points against "small probability multiplied by high impact" reasoning, but the fact is that a rational agent has to have a belief  about the probability of any event, and inaction is itself a form of action that could be costly due to missing out on everything; privileging inaction is a good heuristic but only a moderately strong one. Is "take the inverse of the size of the best-fitting reference class" a decent way of getting a first-order approximation? If not, why not? If yes, what are some heuristics for optimizing it?

In other news, I discovered another (possibly already known, but I have not seen it before) argument against complying with Pascal's mugger: there is a strong economic argument that cooperating with muggings is anti-utilitarian because it incentivizes the perpetrator to commit more of them, and in those worlds where someone actually can torture 3^^^3 people for fun they will likely be able and willing to do it again, so my cooperation may end up leading to the torture of more than 3^^^3 people from the result of future muggings carried out by the now-encouraged perpetrator; therefore since I don't even know the sign of the EV of the result it's better not to cooperate. Because this double-sidedness property is also one of the standard knockdowns against Pascal's Wager ("for every god G who would put you into heaven for worshipping him, there exists a god G' who would put you in hell for worshipping G, so why privilege G over G'?"), I am starting to think that it might form the basis of a more fundamental case against wagers/muggings of that class. Is this a good line of reasoning, or am I treading too dangerously close to how Rothbardians sometimes defend deontological libertarianism by trying to take every individual knockdown scenario that opponents provide and finding some pedantic non-central feature that invalidates that particular example?

My thinking is that if double-sidedness is the correct knockdown to Pascalian scenarios, then the standard prejudice against low-probability/high-impact scenarios would apply less here because there very clearly is only the upside and not the downside (BTC cannot be worth less than $0).