The Antifragility of Bitcoin

Haven’t you heard? Bitcoin is dead.

No more hodling, no more lambos, no more dreams of a decentralized cryptocurrency allowing you to send money to anyone anywhere in the world without any intermediaries taking a cut.

Bitcoin is dead and gone.

In fact, it’s so dead, it’s not the first time it dies.

Say what?

Night of the Living Dead

In fact, Bitcoin has been proclaimed dead hundreds of times, the first time in December 2010 and the latest (as of the date of this post) in March 2018.

All of this may remind you of somebody’s grandma who is told she only has five years left at seventy and goes on to live to one hundred. But Bitcoin isn’t like that either. It isn’t a stubborn weed that just refuses to die.

Bitcoin is antifragile.

What is antifragility?

Whereas the concept of fragility is very easy to understand (think of Humpty Dumpty falling off the wall, shattering to a million pieces), antifragility is often confused with resiliency, and they are not the same thing. Nicholas Nassim Taleb, who coined the term “antifragility”, uses mythology to explain the difference.

Something that is resilient is something that can withstand damage. The example Taleb uses is that of the phoenix, which, dies in a burst of flames, only to be reborn again from the ashes. For antifragility, one must turn to a more exotic beast:

Hydra, in Greek mythology, is a serpent-like creature that dwells in the lake of Lerna, near Argos, and has numerous heads. Each time one is cut off, two grow back. So harm is what it likes. Hydra represents antifragility.

And so does Bitcoin. In fact, when you take a look at BTC’s colorful history, there hasn’t been a single time when it hasn’t been under attack from either hackers, the media, or bears. Put more broadly though, what Bitcoin has always been exposed to are disordering events. This is precisely what strengthens it.

In the words of Taleb:

Wind extinguishes a candle and energizes a fire.

Likewise, with randomness, uncertainty, chaos, you want to use them, not hide from them. You want to be the fire and wish for the wind.

The antifragile grows stronger when its exposed to disordering events. Just like muscles in a bodybuilder, stress makes them grow. And like every bodybuilder worth its salt knows, the old lady machines at Planet Fitness won’t cut the job. Real strength is built by using free weights, where your muscles have to move and stabilize the weights across different planes of motion.

The exact way in which your muscles must work every lift can’t be predicted, and so your body overcompensates the unpredictability by building stronger muscles.

Bitcoin has also been exposed to the unpredictable and has thus managed to face quite a few disordering events. The first person (to my knowledge) to make the case for Bitcoin’s antifragility was Jimmy Song in the following presentation. In the following paragraphs we will discuss the essence of Song’s arguments.

Technological Antifragility

According to Song, Bitcoin is antifragile from a technological standpoint. At $8,000/1BTC, Bitcoin represents a $161 billion prize for any hacker who can crack it open. And Bitcoin has always been under siege from different technical disordering events such as:

· Protocol Level Attacks, which could be hacks due to bugs in Bitcoin’s code;

· Denial of Service Attacks, in which thousands of diminutive transactions are sent over the network to clog it and render it unusable; and

· Different technologies, such as more innovative cryptocurrencies which could make it obsolete.

Each time Bitcoin is exposed to these disordering events, it grows stronger, as the core developers upgrade Bitcoin’s code or other solutions are developed on top.

Protocol level attacks led to developers fixing problems such as transaction malleability, DoS attacks have led to a more expensive to use Bitcoin, which subsequently led to the development of the Lightning Network, and Hard Forks have allowed the community to experiment with different versions of Bitcoin to choose the best.

Safety in Redundancy

Some sceptics might still be wondering how Bitcoin has been able to withstand these attacks and what makes us think that it will continue to do so and learn from the attacks.

The answer lies in nature.

Have you ever wondered why you have two lungs, or two kidneys, when one would do just fine? The reason is that nature has recognized that redundancy is safe. Again, quoting Taleb:

Layers of redundancy are the central risk management property of natural systems.

A core feature of Bitcoin are its redundancy layers. The Blockchain is stored on every node, when one copy would do just fine, and every miner is trying to solve the same block. That makes it more expensive, inefficient and costlier than other transaction networks such as Visa.

It also makes it safer: From Antifragility:

Redundancy is ambiguous because it seems like a waste if nothing unusual happens. Except that something unusual happens – usually.

Which is why Bitcoin also has a better shot at surviving than any other alt-coin – but more on that in a second.

The great thing about Bitcoin is all the experimenting it has fostered. Although the Bitcoin core itself is static and hard to change, anyone is free to implement second layer solutions to any and all problems any Bitcoin user may face:

The process of discovery (or innovation, or technological progress) itself depends on antifragile tinkering, aggressive risk bearing rather than formal education.

Besides the famous Lightning Network, other examples of second layer solutions are being built constantly, such as Drivechain’s side chain project which allow for the creation of altcoins or RSK labs smart contract capabilities.

Although we can expect that many of these solutions will fail, they will not affect the value of Bitcoin one bit, as the experimentation is going on at a different level. However, any successes will boost the value of Bitcoin, which grants Bitcoin an option-like quality, as articulated in this article by Steven Mckie.

Bitcoin vs. the Alt-Coins: The Lindy Effect

Before we continue with Song’s arguments, have you ever heard of the Lindy Effect?

Lindy is a delicatessen in New York, where way back in the sixties, actors would gather to discuss the success and failure of Broadway shows.

They came up with a fascinating finding.

They found out that if a Broadway show lasted, let’s say one hundred days, it’s future life expectancy was another hundred more. If the show had lasted two hundred days, the show could be expected to go on for another two hundred more.

That is the Lindy Effect, which Taleb has also applied to ideas, books, technology and everything nonperishable.

We all learn early on in life that books and ideas are antifragile and get nourishment from attacks – to borrow from the Roman emperor Marcus Aurelius (one of the doer-Stoic authors), ‘fire feeds on obstacles.’

What does this have to do with crypto?

Well, Bitcoin has been around for nine years, longer than any other cryptocurrency out there. Over the course of the past nine years, Bitcoin has been under all sorts of attacks. And yet it is still thriving.

The same can’t be said of any other alt-coin.

As Taleb says, “the only effective judge of things is time” – sure, a new ICO may be hyped to the moon but how likely is it to still be around five years from now. In addition, what could be seen as improvements on the simple Bitcoin model could turn out to be liabilities as alt coins grow more sophisticated.

Sophistication, a certain brand of sophistication, also brings fragility to Black Swans: as societies gain in complexity, with more and more ‘cutting edge’ sophistication in them, and more and more specialization, they become increasingly vulnerable to collapse.

But Bitcoin is dead simple in its objectives and ambitions, and with the Lindy effect, we can expect it to be around for at least nine years more. Every month Bitcoin is still thriving adds up to its life expectancy.

When it comes to long-term investing in crypto, there is no beating Bitcoin.

Of course, by the same extension, one could consider that the Lindy Effect means that Bitcoin will have a hard time dethroning fiat currencies and remittances services such as Moneygram and Western Union.

And to some extent this is true.

Can anyone envision a world without fiat within the next ten years? How about within the next twenty?

Fiat currencies have been the main currency type for the past fifty years. Although crypto may dethrone all fiat currencies as the main currency type, it isn’t hard to imagine that some governments will hold on obstinately to their money printing machines for a long time to come.

Economic Antifragility

The second way in which Bitcoin is antifragile according to Song is economically. Specifically, this refers to how Bitcoin grows stronger from economically disordering events such as:

· The collapse of companies in the Bitcoin ecosystem.

· Entire governments banning the use of Bitcoin; and

· Irrational exuberance and Boom-Bust cycles.

Although many Bitcoin related companies have crashed, there is perhaps none as infamous as Mt. Gox.

Mt.Gox actually stands out for Magic the Gathering Online eXchange, and that’s just what it was in the beginning. But that idea didn’t pan out, so in a few years Mt. Gox did a complete 360 and became the first Bitcoin exchange. In a few years Mt. Gox was handling most Bitcoin trades worldwide.

Yet the site never grew out of its playing card game mentality. It failed to meet regulatory requirements or establish adequate security measures. Without anyone noticing, hackers stole 744,408 Bitcoins from Mt. Gox’s wallets, worth over $6 billion today! The site eventually filed for bankruptcy in 2014, causing a 34% crash in the market price of Bitcoin.

Panic followed in the wake of the Mt. Gox fiasco, and although hindsight is 20/20, its is now easy to see that that event was necessary to produce a stronger ecosystem.

There are now several Bitcoin exchanges, most of them use heavy encryption and monitor compliance with applicable regulations closely. Hackers continue stealing Bitcoin from the exchanges, but each time it happens, the amount stolen is less. The impact on the market is less pronounced. HODLers don’t even blink an eye.

Ultimately, some or all of the existing exchanges may fail. But the community is quickly getting around that problem with the development of decentralized exchanges.

And everyone now know that you can’t have your coins lying in the exchange.

(You do know that, right?).

Economic disordering events can also come in the form of government bans. China, for example, has been trying to ban certain aspects related to Bitcoin and other Cryptocurrencies such as exchanges. One of the first crackdowns came in 2017, when Chinese exchanges accounted for 45% of the global total trading volume. After the announcement by Chinese authorities, Bitcoin prices suddenly dropped 20%.

Other crackdowns have followed, through 2017 and 2018, but don’t tell BTC. The price of one Coin quadrupled in the months following the first China ban, and the price is still over double what it was at the time of the announcement of the China ban.

Bitcoin investors have found that, even if a very significant player in the crypto-sphere moves to ban Bitcoin, the effect will be short lived as exchanges and user move to more favorable jurisdictions. This has prompted some forward-thinking governments (and individuals) to strive for crypto-friendly regulations.

Even without those, we now know that Bitcoin is antifragile to government intervention.

Finally, Bitcoin has exhibited antifragility towards irrational exuberance.

Irrational exuberance was a term coined by the famous (or infamous to the crypto-community) economist Alan Greenspan to describe the high P/E ratios of the dot com bubble. Bitcoin has also exhibited irrational exuberance more than once, however with every boom and bust cycle HODLers have learned to ignore the price and just hold on to their coins.

There are few groups of investors as stolid as Bitcoin investors. Hard core HODLers could see the price of Bitcoin fall below $1,000 and most won’t sell, as they have faith in the long-term possibilities of BTC.

Social Antifragility

Finally, the third way in which Bitcoin is antifragile is from a social or community standpoint.

The first disordering event anyone who joins the Bitcoin community has to face is the fear, uncertainty, and doubt attack, a.k.a as bitcoin is a tulip attack.

As I mentioned at the start of this article, Bitcoin has been called a tulip, a bubble, or an outright fraud from the start, by both well-known economists, investors, politicians and businsmen; regular Joes and Janes at the bar, the hair salon; and the ubiquitous well-meaning family member at the dinner table.

Let’s look at just a few famous Bitcoin bashers:

Paul Krugman – Nobel-Prize Winning Economist.

Joe Weisenthal – New York Times Columnist

Mark T Williams – Finance Professor at Boston University School of Management

Robert Shiller – Nobel-Prize Winning Economist and Author of Irrational Exuberance

Warren Buffet – Value Investor and Real Life Scrooge McDuck

Jeffrey Robinson – Author of Bitcon – The Naked Truth about Bitcoin

Axel Weber – UBS Chairman

David Yermack – Finance Department Chairman at NYU’s Stern School of Business

Jim Rickards – Author

Jamie Dimon – JP Morgan CEO

Ben Bernanke – Former Head of U.S Federal Reserve Bank

Chances are slim that the titles of these anti-BTCers compelled you to cash out of your Bitcoin holdings. These so-called experts are appealing to their authority to make claims about Bitcoin’s future, but they have no idea of what that will be like. No one does.

But who’s going to believe in a bunch of old rich guys who have no skin in the game and probably haven’t tried one single Bitcoin transaction?

More substantial than famous people bashing Bitcoin are governance takeover attacks. Although the Bitcoin community is composed of many different types of individuals and business, they each have their own interests. Although this is an inherent feature of any democracy, organized minorities have usually found a way to bend the situation in their favor.

This was a deliberate threat to Bitcoin when over 50 businesses joined in the New York Agreement to dictate a solution to the Bitcoin scaling debate which naturally favored them.

These business owners expected to have things their way, but unexpectedly the community fought back and, unlike regular democracies, no one is hard bound to trading a cryptocurrency.

The result? The famous Bitcoin – Bcash fork.

And whereas forks may be seen as flaw in Bitcoin, as it represented a significant disordering event, now that the dust has cleared, and preferences have been clearly signaled, it is clear that the BTC community is stronger and more united than ever.

Which leads us to the final point in which Bitcoin is socially antifragile, the ability to fork and choose alternatives. This has allowed Bitcoin to grow stronger as different models are tested at the same time and only one survives. Let’s quote Taleb, quoting Jean-Jacques Rousseau, quoting Machiavelli:

Jean-Jacques Rousseau wrote, citing him: “It seemed, wrote Machiavelli, that in the midst of murders and civil wars, our republic became stronger [and] its citizens infused with virtues… A little bit of agitation gives resources to souls and what makes the species prosper isn’t peace, but freedom.”

No Guarantees

This brings us to the end of our study of the antifragility of Bitcoin based on Jimmy Song’s interpretation of Nicholas Nassim Taleb’s work. An important point underlying all of Song’s discussion is the importance of the lack of guarantees. There are many ways in which you can lose Bitcoin. And price fluctuations are an ever-present threat.

And this breeds prudence, judiciousness and temperance in every individual Bitcoin investor. The problems faced by the community also breed creativeness and out of the box solutions to problems we didn’t know we have. That makes Bitcoin and us HODLers antifragile.

If we have skin in the game, what doesn’t kill us will make us stronger. But that’s the subject of a future article.