Bitcoin is Anti-Fragile: 20 Reasons
By Stephen Perrenod on The Capital
“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.
- 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.
- Decentralized: Bitcoin is decentralized in its creation through mining, in its ledger, and in the ecosystem. The nodes are everywhere, in over 100 countries. Bitcoin as a network, and as a form of money, is transnational and global. Bitcoin is held in 50 million different wallets.
- Heuristic design: Bitcoin follows heuristic design principles. It is aesthetic, minimalistic, real-world oriented, and the status of network parameters is continually visible. Bitcoin has become the de-facto standard for digital assets.
- Small but general purpose: Bitcoin only has about 100K lines of code from fewer than 1000 contributors. And yet in principle, it allows up to a billion dollars or more of value to be sent to anyone, anywhere. This is an extremely general purpose functionality.
- Holistic work: Bitcoin crosses many disciplines, including monetary economics, security, cryptography, specialized supercomputing, peer-to-peer messaging, decentralized data management, and decentralized social networks, and it provides a platform for a robust ecosystem layered above its blockchain and the Nakamoto consensus.
- Phenomenology: Bitcoin has theoretical roots, but above all is a practical system with clever choices to solve the double-spending problem, to manage block size and frequency, and to adjust the difficulty of the cryptographic puzzle regularly. It implements an inspired monetary policy through the Halving mechanism; this policy ensures scarcity and by ratcheting supply down provides an antifragile evolutionary pressure on the system.
- Rewards strong ethics, virtue-based: The bitcoin security model rewards virtue and protects against fraud (e.g. double-spending). Trust is decentralized across the network. The system rejects attempts to fork the blockchain, either fraudulently or with no added value.
- Attracts devoted participants with ‘soul in the game’: The open source and cypherpunk nature of Bitcoin has attracted participants committed to the concept of decentralized non-state money. This is true both for developers who donate their time to the code base as well as those who leave traditional finance or technology careers in seek of employment, purpose, and economic gain in the Bitcoin ecosystem.
- Private contracts: Bitcoin provides a platform for simple private contracts to be executed without any need to invoke a complex legal system. The blockchain is the arbiter.
- FU money: Bitcoin is FU money that is not tied to the state, and not tied to the banking system. You don’t have to ask a bank for permission to take it out or send it to someone. It is the functional equivalent of gold coins in a safe, but more divisible, more transportable, and more fungible. In fact, you may want to put your hardware wallet in a safe. Protect your wallet.
- Fail fast: There have been many attempts over the past decade to create a “better Bitcoin.” None have succeeded. This includes both coins that copied Bitcoin core concepts on new blockchains and attempts such as BCash and BSV that were hard forks away from Bitcoin. Bitcoin, being anti-fragile, has benefited from these attempts, rejecting most modifications, yet implementing a few sound ideas through the community BIP process.
- Convex to errors: Errors get pruned quickly. “Fake” extensions to the blockchain are deprecated with exponential rapidity. Outside of the blockchain, on exchanges and elsewhere, many errors occur, and it is left to the community to learn from those and to continually improve security for wallets and off-chain transactions.
- Annealing: Annealing is the process of raising the temperature and then lowering it to enhance the properties of a metallic object or, in simulated annealing, to fit an optimal solution of a multivariate computational problem by increasing then decreasing volatility. With increased volatility, we can move from a suboptimal solution toward a more optimal one. In terms of Bitcoin, this means the volatility in the system strengthens it for the future.
- Post-traumatic growth: Bitcoin faces continued stresses, and these have made it stronger, which is known as post-traumatic growth. Difficulty adjustments happen every two weeks as moderate stresses and the Halvings are major stressors that occur every four years. Government attempts to regulate it are turned away and end up being confined to regulation of exchanges and on-ramps. Forks have not diverted it or slowed it down. Frauds on exchanges may affect perception, especially externally, but they ultimately reinforce the value of secure private money to those in the know.
- Non-correlated hedge: Bitcoin has historically had low correlations to stock prices, bond yields, and commodity prices. In the past 3 years, the one-year correlation with the S&P 500 has been low, ranging from -0.13 to +0.23. It thus can serve as a useful hedging vehicle.
- Distributed randomness: There are many elements that inject useful randomness into the Nakamoto consensus protocol and the Bitcoin ecosystem. These include variable block times, the difficulty adjustment, and the Halvings. Also important, of course, is the price volatility across both long and short time scales. Increasing prices attract new investors into a scarce asset.
- Nonlinear convexity: Bitcoin exhibits convexity, which can be demonstrated from its positive bias. Price fluctuations have a payoff that is greater than the downside. The downside is absolutely limited to the current price and the upside gain potential is much larger than the current price. The Jensen bias ratio is over one, indicating convexity, for simple models like a Lindy model (based on lifetime, now 12 Block years) or the Future Supply Model (based on remaining Bitcoin to be mined).
- Positive skew: For simple models such as a Lindy model tied to block count or the Future Supply model tied to remaining reserves, the model residual errors are strongly skewed positively, to the upside. (https://medium.com/the-capital/the-future-supply-model-era-4-ca3e9591d871#74d7).
- Call option: Bitcoin is a call option on a new asset-based economic system built upon a radically new type of money that adheres to classical principles in a way that debt-based fiat does not. Bitcoin does not need to fully replace the current system to have substantial value, it can exist as a parallel system that continues to grow, but benefits from the increasing fragility of the fiat fractional reserve credit system with ever-higher debt levels.
- Long gamma (option gets relatively more valuable as the price rises): Gamma is the second derivative of an option price. Delta is the first derivative and is the speed of option price change, gamma is the acceleration. Long gamma, a measure of convexity, means you benefit from volatility. Bitcoin benefits from volatility, analogous with long gamma optionality.
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.
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.
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.
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.