Statistician, author, and former trader Nassim Taleb commands noteworthy sway across the cryptocurrency market. Enthusiasts around the world are eager to read about Taleb’s views on their young financial market to try to glean some golden nugget of information. Even if it doesn’t give them an edge, the hope is that it will at least lend optimism and credence to this largely experimental endeavor. In his many works on randomness and probability along with his commentary in the public sphere, Taleb speaks highly of Bitcoin.
He says, “… Bitcoin is an excellent idea. It fulfills the needs of the complex system, not because it is a cryptocurrency, but precisely because it has no owner, no authority that can decide its fate. It is owned by the crowd, its users. And it has now a track record of several years, enough for it to be an animal in its own right.”
Taken from a blog post written by Taleb earlier this year, the quote subtly incorporates an idea that he has mentioned a few times previously—most notably in his immensely popular book Antifragile. It’s called the Lindy effect, and it is a particularly intriguing method of estimating the lifespan of ideas, which Taleb (and some others) have invoked to give us all a better idea about how long we can expect the cryptocurrency craze to last.
The Lindy Effect’s Origins
Lindy’s Deli on 7th Avenue, in Manhattan, is where it began. Broadway actors eating here discussed their common observation that the longer any single play ran on Broadway, the longer it would run off Broadway. Modern measurements of the Lindy effect on its original object of focus, a Broadway play, still hold true. Life expectancy is proportional to age. Eventually, “the Lindy effect” evolved from a casual observation into an evident theory which can be applied to many things. Non-perishable assets like ideas, technology, or religion, are all relevant. It’s believed that Bitcoin is no exception.
Taleb mentioned the Lindy effect in Antifragile because antifragility is a trait of any asset to which the Lindy effect applies. It means that the asset gains a sort of stamina as it continues to survive against the odds, thereby demonstrating strength and the ability to attain longevity. Broadway, for example, is a competitive environment. People have evolving tastes, there are always different shows vying for the best matinees and stages, and as a show ages it gets more difficult to sustain. With new plays arriving on the scene, the number of people who have already seen an older play increases, actors move on to different projects, and other factors eventually lead to its inevitable fizzling out on Broadway.
However, the longer a show has run on Broadway, the more credibility and notoriety is has earned. Off Broadway stages are eager to reproduce it in their own towns, lending longevity to the play. Is Bitcoin similar? Yes. Both Bitcoin and a Broadway play are unperishable “ideas”. On Broadway, the best shows run for decades regardless of where they are or who plays the main roles. A few prominent blockchain ideas also “survive” in this manner and are able to persist despite increasing friction in the market—but the comparison isn’t perfect.
The Theory Doesn’t Fit Like a Glove
Some argue that the sample size in cryptocurrency is too small to apply the Lindy effect. There are too few examples with longevity, too little data, and we may also be too early in the timeline to form a proper perspective on its outlook. For any single cryptocurrency, the notion of “surviving” is therefore difficult to define. It’s easier to measure the lifespan of a Broadway show. The show is either running on Broadway or it isn’t. Once it’s off Broadway, then it’s only a (measurable) matter of time until it’s not being performed at all.
Where is this “half-life” point for a cryptocurrency? Not when it’s taken offline, certainly, because that precludes any remaining life whatsoever. Maybe when the decentralized network seizes due to inactivity, like an engine without oil? Or perhaps it’s when a hacker takes it down, leaving the network operational but with a scuttled reputation. Age is definitely not a good measurement because a defunct cryptocurrency can essentially exist forever. These questions reveal what the Lindy effect can’t yet tell us about cryptocurrency, and what it can.
Re-purposing Lindy for a Unique Asset
For the above reasons, it’s uncertain whether the Lindy effect can truly be related to a cryptocurrency’s lifespan. That doesn’t mean the theory isn’t relevant—we may just be applying it incorrectly. The market is likely zooming in too closely to use the Lindy effect as a method for predicting the life of any single crypto solution because it’s not yet a foregone conclusion that the idea of cryptocurrency itself will last.
It may be possible to use the Lindy effect to evaluate Bitcoin, and perhaps Ethereum’s lifespan, but in the latter case, Ethereum has only been around for 3 years. Bitcoin for less than 10. This timeframe is hardly long enough to form any kind of grasp on their waxing or waning sustainability, and both are tied to the same fate, regardless. Therefore, it’s more useful (and much easier) to apply the Lindy effect to the concept of cryptocurrency as a whole. Where it’s hard to tell when one cryptocurrency project begins to taper, and indeed, if it’s already “dead”, it’s not difficult to imagine how cryptocurrency would reach its finale.
If we wanted to apply the Lindy effect to measure the longevity of the idea of cryptocurrency, then it would already have at least three factors:
- Cryptography and network defenses
- Incentive to participate
- Regulatory environment
A significant disruption of any of the above components would effectively take cryptocurrency “off Broadway”, though for now it’s still live. Should any of the following become a reality, however, cryptocurrency might quickly enter its “afterlife”:
- Quantum computing and the obsolescence of cryptography
- The financialization of markets to the point where volatility is null
- An outright ban on cryptocurrency, or exorbitant taxes
At our present point a decade into the “crypto experiment”, if any of the above were to transpire, the Lindy effect would tell us that it will be another decade or so before the idea finally sputters and dies. Taleb has raised similar points in his many public addresses and published works but applying theoretical laws to such a special type of asset is simply asking for fallacious assumptions. The blockchain of 2018 has evolved notably when compared to its humble origins, and it’s probably safe to say that it has already died tens of times—and in tens of iterations—over the last few years. Progress is blindingly fast.
Proof of Work blockchains, for instance, may now be in their death throes. Bitcoin’s wasteful resource requirements, slow transaction times, and imbalanced miner pool were understood years ago. Could Bitcoin be in its “afterlife” right now—a few precious years of life left before traders collectively let it go extinct? It doesn’t take a Lindy’s corned-beef sandwich, a 7th Avenue view, or a PhD from the Sorbonne to admit that it’s possible.