Bitcoin is Anti-Fragile: 20 Reasons

By Stephen Perrenod on The Capital

Stephen Perrenod
Jul 2, 2020 · 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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. 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).
  17. 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).
  18. 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.
  19. 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.

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.

Appendix: Quantifying Bitcoin’s Convexity and Positive Skew

Future Supply Model

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

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Stephen Perrenod

Written by

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

The Capital

A publishing platform for professionals in business, finance, and tech

Stephen Perrenod

Written by

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

The Capital

A publishing platform for professionals in business, finance, and tech

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