Bitcoin is Anti-Fragile: 20 Reasons

By Stephen Perrenod on The Capital

Stephen Perrenod
Jul 2 · 10 min read

“Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.” — Nassim Nicholas Taleb

Bitcoin Improves as it Faces Uncertainty

This article is inspired by Nassim Nicholas Taleb’s Antifragile: Things that Gain from Disorder. The term that he created, Antifragile, means beyond resiliency, beyond robustness. It conveys something that improves in response to shocks and errors, as happens in the evolution of living organisms with errors and mutations. The most adaptable survive and prosper. This also happens for humans individually when they exercise; moderate stresses on the body confer benefits overall. Whole industries benefit from failures as weaker firms and less useful business ideas are weeded out (‘creative destruction’) and resources flow to superior technology and its implementation.

Bitcoin has survived many errors, shocks, and even splits from the main branch of its evolutionary tree. Bitcoin has falsely been declared dead by journalists and old fiat economy-wise men and women (or fiat economy dependent people) some 380 times: https://99bitcoins.com/bitcoin-obituaries/. All these events, or concerns, or self-interested attacks (Jamie Dimon, I am thinking of you) have not stopped Bitcoin. It gets stronger with every block laid down. Each 10 minutes the security of all prior transactions from all prior 630,000 plus blocks is enhanced.

Bitcoin is now functionally eternal, it certainly is positioned to survive beyond the year 2100. In each four-year era between Halvings, Bitcoin has grown in value, roughly as the fifth(!) power of the number of elapsed years (or number of blocks laid down). Over 100 million trillion hash calculations are being made every second by millions of ASIC mining rigs around the world to secure new transactions on its timechain.

Bitcoin is a black swan in relation to the fiat economy and banking system and emerged at the time of one of the largest black swans ever to hit the US and global economies. The Great Financial Crisis in 2008 was built on a sandpile of easy mortgage debt and easy money more generally and was triggered by mortgage shenanigans (CDOs, false security ratings, CDOs squared, liar loans, etc.).

Until Bitcoin emerged, it was unimagined in the population at large, especially by the banker and economist population. It is the most revolutionary new economic idea of the 21st century to date, although it is based on classic principles of security, fungibility, and scarcity required for monetary value.

Bitcoin has a monetary policy that makes it the hardest money ever, the scarcest on the planet. It is now scarcer in these terms than gold, possessing a deflationary trend that will take it from 1.8% supply growth to 0.9% four years from now and only 0.4% four years after that.

  1. Functional redundancy: Bitcoin transactions are replicated on thousands of full nodes spread around the world. The number of reachable nodes is over 10,000 https://bitnodes.io and the total number of nodes higher.

Summary

Let us revisit the definition of antifragile. In Bitcoin’s case, it is essentially upside optionality with limited downside. Bitcoin may find a value of $100,000 or even $1 million in the future according to various models and estimates. The downside is limited. It can only drop towards zero, and at lower prices, there have always been willing buyers for an asset whose supply is strictly limited to 21 million Bitcoin units.

Antifragile means that the errors, the attempts to legislate it away, the price fluctuations, the fraud and theft on off-blockchain exchanges, the forks, the difficulty adjustments, the Halvings, all work to make Bitcoin not only robust against failure but strengthen it as a store of value. For this reason, and in line with a strong Lindy effect, Bitcoin has increased by roughly the fifth power of the number of blocks in the blockchain over the past decade.

No other blockchain has the same degree of antifragility. This can be measured by the hashing power deployed and the value of digital assets stored on the blockchain. Its antifragility and security can also be seen in the cost to rent enough compute power to attack it (51% attack). The cost to attack the Bitcoin blockchain is nearly an order of magnitude higher than the Bitcoins one would earn.

Bitcoin’s market cap is seven times as large as the nearest competitor. In a world of 5500 cryptocurrencies, Bitcoin has captured 65% of the total available market cap because its security and its antifragility are much higher than that of other cryptocurrencies.

It also has been the top-performing asset class in the past decade and has outperformed gold, stocks, and US treasury bonds during 2020, even though gold and bonds have done very well. Its antifragility has been effectively demonstrated by its response during the COVID-19 pandemic so far.

Appendix: Quantifying Bitcoin’s Convexity and Positive Skew

Future Supply Model

The Future Supply model regresses the log of Bitcoin’s market cap against the fractional supply remaining (percentage of Bitcoins yet to be mined). Market cap increases as the supply decreases. More detail can be found in the article linked from reason (18) above.

Let’s examine the residuals from the model best fit for the period from 8 to 12 elapsed Block years, i.e. the 4 years up until the last Halving on May 11, 2020. A Block year at 52,500 blocks is one-quarter of the interval between halvings, so we are looking at the latest Bitcoin era, between the second and third halvings.

The histogram shows the log 10 residuals for the market cap model with 49 monthly data points. The mean of 0.102 is greater than the median 0.018, and the maximum excursion is 1.009 or twice the magnitude of the minimum at -0.479. For an absolute magnitude above 0.5, the model has only positive residuals.

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Histogram, log 10 of market cap residuals for Future Supply Model, Block years 8 to 12

The Jensen’s inequality ratio is 1.17, indicating convexity (the Jensen inequality compares the model result from the average of its inputs to the average of the model’s outputs.

Visual examination of the histogram also indicates that the upside in market cap is greater than the downside, reflecting the strong upward price moves that Bitcoin has from time to time.

Lindy Model

The Lindy model regresses the price of Bitcoin against the number of blocks created in the blockchain, or equivalently the number of Block years elapsed. More detail can be found in the article linked from (18) above. The Lindy model refers to the Lindy effect; a technology’s future expected lifetime becomes longer, the longer it has been existence. In this case, we are imputing additional value to Bitcoin as a result of the passage of time and extension of the blockchain. That may be causally due to implicit variables such as increased hash rate and difficulty, higher stock-to-flow, lower outstanding reserve supply, and increased market awareness and participation. The model is essentially phenomenological (reason 6 above).

Let’s examine the residuals from the Lindy model best fit for the same period from 8 to 12 elapsed Block years up until the last halving.

These are log 10 residuals in price and the mean of 0.063 is greater than the median -0.025, and the maximum excursion is 0.94 or twice the magnitude of the minimum at -0.475. For residuals with an absolute magnitude above 0.5 one sees only positive residuals. Positive excursions are larger than negative ones.

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Histogram, log 10 of price residuals for Lindy Model, Block years 8 to 12

The Jensen’s inequality ratio for this data set is 1.35, indicating convexity (any value above 1 is convex).

Visual examination of the histogram also indicates the upside in price is greater than the downside, again reflecting the strong upward price moves that Bitcoin has from time to time.


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Stephen Perrenod

Written by

supercomputing expert, astrophysicist, cryptocurrency analyst, orionx.net, author of DarkMatter, DarkEnergy, DarkGravity

The Capital

The Capital is a financially incentivized social micro-publishing business platform

Stephen Perrenod

Written by

supercomputing expert, astrophysicist, cryptocurrency analyst, orionx.net, author of DarkMatter, DarkEnergy, DarkGravity

The Capital

The Capital is a financially incentivized social micro-publishing business platform

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