In the last two years, we have seen an explosion in the number of cryptocurrencies. But with so many coins in the market, only a handful have seen any real use. Most projects have not come close to delivering on their grandiose visions. A recent research report published in August 2018 showed that only 36 cryptos in the top 100 have a working product. With so many useless projects floating about, we have to wonder why they’re still around. Why have the bad ones not gone to zero? What’s taking the market so long to punish bad projects? While we could blame it on a young market, I have a different theory: cryptocurrencies are too robust. It’s too hard for them to die. Companies are fragile. During the .Com bust, bad internet companies eventually ran out of cash and went bankrupt. The market was able to distinguish between the good and the bad. Because of that, the good companies were spared. I don’t see the same fragility with individual cryptos right now. Bad coins can feed off the success of their peers, outliving their natural lifespan. Almost every coin in the top 200 by market cap is highly correlated with the rest of the market. In this article, I’m going to fully flesh out this theory and borrow some very important ideas on fragility, robustness, and antifragility from the eclectic Nassim Nicholas Taleb. The Fragile, the Robust, and the Antifragile In the book , Taleb outlines the difference between three distinct properties. Antifragile Fragility — harmed by volatility Robustness — resilient to volatility Antifragility — benefits from volatility We are well equipped to understand both the fragile and the robust because we can easily find examples in our day-to-day lives. A porcelain teacup is fragile. A sturdy package wrapped in bubble wrap is robust. But antifragility, the property of growing stronger in a volatile environment, is not something we often consider. Taleb outlines two main forces at play when something benefits from volatility. Hormesis The first of these forces is hormesis, a Greek word meaning “to excite”. In toxicology, hormesis refers to the dose-response phenomenon characterized by a low dose stimulation, high dose inhibition. I.e. tiny doses of toxins may benefit the body instead of harming it, and larger doses become dangerous. Doses are small enough to benefit the individual when they are in the hormetic region. While we know that exposure to strong radiation causes cancer, researchers also found out that extremely low doses of radiation can stimulate DNA repair and delay cancer in mice. When we exercise, the increase in metabolism generates free radicals which can be very damaging. But after a period of rest, the body adapts and grows stronger. Taleb defines hormesis as stress that does not kill the individual but causes the them to grow stronger, as it prepares and compensates for a even stronger stress the next time. Transfer of Antifragility from the Individual to the Collective Sometimes the stress is too strong for any hormetic effect because it kills the individual. But as the individual perishes, the overall population grows stronger. This isn’t because stress has caused any of the surviving members to grow any stronger. In fact, they may also be weaker. However, removing weaker individuals from the population, results in a surviving population that is fitter on average. Think about an exit exam like the bar. Many fail, but the group of lawyers who pass it are stronger, having survived the challenge. Antifragility in layers The concept of antifragility applies to any environment where the individual can be considered as both a unit, and a collective. If you drink a little bit of poison, some of your cells will die. The ones that survive become stronger and more resistant of the poison, improving your fitness to it. If an epidemic ravages the populace, many humans die. The population that survives is more fit to withstand the disease. The anti-fragility of a the higher layer requires the fragility and the sacrifice of a lower layer. This is nature’s very own strengthening mechanism. A restaurant need to be fragile for restaurants to be good As any restauranteur would tell you, the restaurant business is hard. It is an extremely competitive environment where restaurants go bankrupt every minute. But if you go downtown on a Friday evening, you’re likely to find plenty of good restaurants to eat at. It is precisely because poor restaurants perish, that the quality of surviving local restaurants is high. Imagine if restaurants on the brink of bankruptcy were consistently bailed out by taxpayers. We would see a proliferation of poorly run restaurants that offer both terrible food and service. (That’s why banks suck). These restaurants wouldn’t have any pressure to move off high-rent locations, and would make your Friday evening dining experience miserable. Removing danger and mortality from failure, causes competition to stagnate or degrade. Or in the less obvious form, improving the survivability of individuals can actually hurt the well-being of the system. Applying the lesson of antifragility to cryptocurrencies We’ve applied lessons of antifragility to nature — why organisms must perish for the species, and the economy — why restaurants need to perish for the industry to be antifragile. If we apply the same lesson to cryptocurrencies, then it’s obvious to see why individual cryptocurrencies need to be fragile in order for the market to be antifragile. Many people compare the cryptocurrency bubble to the most recent technology bubble we’ve experienced: the dot com bubble. I think it’s a good point of comparison. But Dot Com companies are not like cryptocurrencies. Companies are far more fragile. Dot Com companies burned out quickly The prevailing philosophy for most Dot Com companies was “get large or get lost”. As such, companies prioritized growth at all costs even if it meant incurring net operating losses. Backed by venture capital firms, dot com companies expanded headcount aggressively, spent heavily on advertising and promotions, gave away their products for free, threw lavish parties, and rented very expensive offices. In 2000, there were 16 dot-com commercials during Super Bowl XXXIV, each costing $2 million for a 30-second spot. The “growth over profits” mentality and the aura of “new economy” led companies to believe they were invincible. But once they realized their tactics weren’t working, they quickly became defunct. Pets.com burned through $300 million dollars and went out of business 9 months after its IPO. Webvan burned through more than $1 billion dollars and went out of business 2 years after its IPO. By 2004, 52% of dot com companies that were founded since 1996 had perished. Cryptocurrencies Fizzle Out Slowly According to Coinopsy.com, 350 cryptocurrencies are dead as of August 2018. Compared to the 3,000+ cryptocurrencies that exist, we can roughly say it’s about 10% death rate so far. (DeadCoins reports a higher number, but also has a higher number of obscure coins. The data was also not available for export). For every coin on its list, Coinopsy also records the reason why they died. Here are the top 5 reasons: Despite being classified as dead, most failed cryptocurrency projects are abandoned because they were unable to get traction. Founders walk away without closing anything down. They leave the project to fizzle out. This looks far different compared to the Dot Com companies had close down because they tried to grow big, and were burning cash too quickly. The Bigger they are, the bigger they fall During the Dot Com bust, we saw a lot of well-funded companies go to zero. David Kirsch, a professor of entrepreneurship at the University of Maryland, found that the survival of dot com companies was unrelated how much private equity financing they received.Well-funded companies were just as likely to fail. GovWorks, eToys, Flooz.com, Garden.com raised a combined $1 billion + dollars, and still went defunct. Lower Market Cap Cryptocurrencies are More Likely to Fail Compared to the Dot Com companies that failed, the profile of failed cryptocurrencies looks very different. Of the 350 cryptocurrencies Coinopsy.com has catalogued, the majority of them had market capitalizations below $25 million. Tokens are Too Robust The fact that we haven’t seen any really big market cap cryptocurrencies fail scares me. (Scams like Bitconnect being an obvious exception.) Why is Ripple still among the top 5 by market cap when it isn’t even a decentralized cryptocurrency? My theory is that well-funded tokens are too robust and become too hard to kill. Here are some of the reasons why: Economic Pressure Projects that have completed a successful round of financing during the ICO mania have an insanely long run rate. They can survive off the war chest for a really long time. Mining offloads the operational expense of keeping the project running to others. Unlike companies, there is no pressure for cryptocurrencies to generate revenue and reach profitability. Most projects and investors measure progress by how much code is written, not by how much value the technology captures. There is no incentive for the token project to shut down, the founder(s) can simply walk away and keep the project going on its own. e.g. Dogecoin, Litecoin Decentralization A decentralized blockchain is resilient to death. As long as one miner lives on, the blockchain survives. Blockchains are robust against disagreements. The blockchain can be forked. E.g. Bitcoin Cash, Ethereum Classic Retail Investors Cryptocurrencies can raise capital very easily because they have access to global markets and retail investors. Liquidity premium due to the availability of secondary markets allow cryptocurrencies Cryptocurrencies lack any semblance of fundamental valuation. Therefore, they invite unbounded levels of speculation. Institutional investors can keep a company accountable to its goals and put pressure on teams to perform. In order for retail investors to band together against their own investment, things have to go seriously wrong. Investors have the incentive to drum up hype for others to also buy in. Project specific subreddits are littered with “buy the dip” posts during a rout. Many retail investors pretend to read whitepapers, but truthfully only a few people actually understand the subtleties. Information overload makes mentally exhausting to assess the good projects from the bad ones. Creative Destruction Most people see the dot com bust as a cautionary tale of irrational exuberance, foolish spending, and speculation. But there are a lot of things that the dot com bubble got right, and it took an act of creative destruction to illuminate the companies that were worth building. It’s been 10 years since the invention of Bitcoin, and I hope to see the same thing for cryptocurrencies. It makes no sense to me that we still see coins like Ripple in the top 5 coins by market cap when it isn’t even a decentralized cryptocurrency. Most people draw similarities between the dot com bubble’s today’s cryptocurrency bubble as if they were exactly the same thing. They aren’t. The underlying asset class investors are speculating about is different. One is tokens, the other is companies. This fact alone is enough to warrant a closer examination. Evolution — The Selfish Gene We can see this concept play out in evolution. In the “selfish gene”, Richard Dawkins theorized that genes and organisms are often in conflict with each other. Taleb takes this one step further and argues that genes wants organisms to be mortal and vulnerable to death so that the genetic code can be antifragile. Imagine if an organism had an indefinite lifespan. To survive the future, it would be able to survive all possible future environments. It would need to predict the future with perfect precision and when the future comes, it must withstand it, or perish. It would be fragile, and harmed by randomness in the environment. On the other hand, an organism that lives one lifespan at a time, with random mutations between each generation does not need to predict future conditions precisely. It can just have a general and vague idea about where things are heading and adapt on the fly. The genetic code benefits from the mortality of individual organisms, and from the randomness of reproduction. It also benefits from the randomness in the environment. If the environment is stable, then likely all the organism’s offspring will survive. But if the environment is also volatile, then only the offspring that are well-suited to that environment will survive. Nature can be quite ruthless. ave gone to zero? There are two projects that are cataloguing dead cryptocurrencies: deadcoins.com coinopsy.com According to deadcoins.com, there are Where is the empirical evidence here? I recently did an analysis on how many cryptocurrencies simply follow the market. Spoiler alert: most coins do. If shitcoins keep rising and sinking with the market, then they will constipate the entire cryptocurrency market.
