1

Bitcoin, Currencies, and Bubbles

Supplementary Material / Simplifications
Nassim Nicholas Taleb∗† ‡
† Universa Investments
‡ Tandon School of Engineering, New York University

R ATIONAL E XPECTATIONS Comment 1

Discretely seen, a price is expected cash flow received at
the end of the next period t + 1 plus expected price at period
t+1. So let Pt , Ct , and It be the price, cash flow (to investor)
and information, respectively, at period t, with rd the discount
rate.
The barrier is at L ≥ 0 but upon hitting the barrier
Pτ = 0. It is similar to saying "if the heart rate drops
below ten beats per minutes, it will be 0 (death)".

FT
  Two ways to treat the ruin problem. A simple way is as
follows. In a discrete model, just use a binomial: p is the
1  Ct+1 +

,
Pt = E(Pt+1 |It ) (1) probability of hitting, K is the discrete r.v. for how many
1 + rd  | {z } 
times the barrier is hit, k the number of hits over n periods.
1+rd (Ct+2 +E(Pt+2 |It ))
1

pk Γ(n + 1)(1 − p)n−k

for by the law of iterated expectations, P(K = k) =
( ) Γ(k + 1)Γ(−k + n + 1)
E E(Pt+2 |It+1 )|It = E(Pt+2 |It ).
The probability of hitting the barrier = 1 – probability of
We note that, at the present, seen from period t, E(Pt+1 |It ) never hitting the barrier. So, for k = 0, since
is written as E(Pt+1 ).
pk Γ(t + 1)(1 − p)n−k
RA
Allora, n periods away: P(K = k) = ,
n ( )i ( )n Γ(k + 1)Γ(−k + n + 1)
∑ 1 1
Pt = Ct+i + E(Pt+n ), (2) n
1 + rd 1 + rd P(K = 0) = (1 − p)n → 0
i=1 | {z }
Small as n→∞ So as t → ∞, the cumulative probability of not hitting the
so we notice that the second term vanishes under the smallest barrier, that is P (K = 0) is 0 for any positive probability p.
positive discount rate. As we increase n, additional cash goes In a continuous time model, with discrete Poisson jumps,
into Ct+n ; in principle for n → ∞ it must be all cash but we consider the PMF of a Poisson distribution with parameter λn,
keep n preasymptotic for this exercise. with λ > 0. :
E ARNING - FREE A SSETS WITH A BSORBING BARRIER eλ(−n) (λn)x
P(K = k) =
Now bitcoin is all in the second term. Applying Eq. 2 to a x!
D

noninterest bearing asset with an absorbing barrier.

P (K = 0) = e−λn → 0,
n

n (
∑ )i ( )n
1 1 for any positive parameter λ.
Pt = Ct+i + E(Pt+n ) (3)
i=1
1 + rd 1 + rd
| {z }
=0 ∀ n
Let L ∈ R be a barrier below current or initial level;
we define the stopping time "from above" as τ ≜ inf{n >
0; Pt+n < L}, with P>τ = 0.

E(Pt+n ) = E(Pt+n |t+n<τ ) + E(Pt+n |t+n>τ )

| {z }
=0
n
Now let us show that as time increases, P(t + n < τ ) → 0,
so the expectation operator goes to 0.
NNT1@nyu.edu
The author thanks Gur Huberman, Mark Spitznagel, Brandon Yarkin,
Trishank Karthik Kuppusamy, Jim Gatheral, Joe Norman, David Boxenhorn,
Antonis Polemitis, Joe Shipman, and others for useful discussions.