Yermak Again

David Yermak came out with an article in my Alma Mater’s publication Technology Review.  I had already commented on his NBER “paper” on the topic of Bitcoin.  This new article is somewhat more “diet”, but contains more of the same inaccuracies and intellectual difficulties.  Below is the link to the article and a verbatim of my comment on TR’s site (some minor typos corrected.)

My Comment

Many of the weaknesses have already been addressed by others. I would only like to point out to Mr. Yermack’s statement on deflation.

 It is far from clear that a wider adoption of Bitcoin would imply deflation.  If Bitcoin became the only medium of exchange in a given community (or the world) though, then there would be deflationary pressures, although issues like money velocity would need to be accounted for.

 It seems the deflation issue is raised as a scarecrow (your salary will be cut!)  I would point out that the best parts of our economy have been in permanent deflation for the last half century and that doesn’t seem to have had any detrimental effect or prevented countless of our best minds to try and get in on these industries.  Try explaining consumers they need to pay Intel, Microsoft or Apple as much for unit of their product as in 1984.  Try telling these companies they need to pay their employees the same salary per kilobyte, petaflop or coolness index produced as they did in 1994.

 Maybe Bitcoin will help usher an era when adjustments to relative price are accepted by members of society without the need to recur to the stratagem of inflation.

 I looked up the author, Mr. David Yermack, who is a professor of Finance at NYU, but also the author of a powerpoint presentation called “The Michelle Markup, the First Lady’s impact on stock prices of fashion companies”.   I have no doubt Mr. Yermak must have worked hard for his professorship at NYU and knows a lot more economics and statistics than I do (just like P.Krugman, another Bitcoin basher), but I think he does not look his best here.

 It is notable that this is a summary of an NBER paper from late last year. Unfortunately, you need to shell 5 bucks to buy the article and read it.  And it ain’t worth it.  Despite the formal academic structure of the paper: abstract, notes, references, black ink on white paper, I think it contains nothing if not the writer’s feelings as described in the free abstract. It is full of inaccuracies, crass errors in basic concepts of statistics and lack of common sense.If it weren’t coming from an established academic, I would figure it was written by a student.

 To save TR readers the five bucks (or to entice them to read it for themselves), a few points on the NBER paper:

 – Like any good academic paper, there are references: two of them! They are Satoshi Nakamoto’s original paper and an article on Wired.

 – The impressive looking tables show volatility measures and correlation with other currencies. Those tables are a sham. We all know the usd/BTC rate is highly volatile, but any statistician worth two cents will tell you that the measure of volatility is highly impacted by trend, and btc shows a clear trend: Up. 

 – Also, the correlation tables are badly designed. There is a conceptual error and also a Stat 101 error (carelessness or intention?)

 — The operational Stat 101 error is that the eur/eur rate could not correlate 100% with the usd as the author shows in the table. The correlation must be 0, since eur/eur equals 1 and a constant series is 0-correlated with any variable series. The author is making the point that btc correlates poorly, so he could not show a 0 there.

 — The conceptual error is claiming that btc is poorly correlated. It is indeed (depending on what r-squared you consider poor), but so is the yen and gold. On the other side, eur, gbp and chf are correlated among themselves, since they are all rather connected to the same EU economic environment. This does not prove anything, but the author hopes no one will really look at the tables.

– Lastly, the big nonsense is claiming that btc is a poor risk management tool because it is not correlated. The first thing you learn in finance courses is that good risk management seeks diversification, and diversification is best achieved by owning assets whose performance is uncorrelated!  This statement is modified in the current article, because someone must have pointed out the problem.  It now says that the Bitcoin risk cannot be hedged. This is partly true, but not very relevant to a forward looking article, since the author does not claims that a hedge is impossible (too silly a claim), only that no market to hedge is there yet.


One response to “Yermak Again

  1. Pingback: Facebook Stock not so different from Bitcoin? | claudiomigliore

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