I’ve been following the cryptocurrency industry since May/June 2017, getting more involved and more interested with each passing month, and to be honest, my interest has grown the most during the midst of the longest bear market. Most of my focus is on the main cryptocurrencies, generally the top 10 on coin market cap. This could partly be due to the fact that they tend to have the greatest media coverage, but also because they have met the greatest success.
I try my best to be aware of what I am reading and to think critically. To ask questions. My teachers always told me that I asked great questions when I was back in school. The right question is more important than an impressive answer.
During this bear market, we are witnessing which cryptocurrencies will succeed, or at least make it to the next bull run. We are also witnessing which companies and crypto exchanges are strong enough and driven/focused enough to survive this bear market. Rather than sitting on the sidelines just watching to see who wins out, I’ve been asking myself the question: what indicators or factors will determine which cryptocurrency projects will succeed?
It is not enough to say “Tron is super popular and has been up 200% over the last month” – that is an impressive answer to a poor question (which crypto is doing great?). It’s not even enough to say “Bitcoin will be $100,000/BTC within the next year” – because that is just sensationalization and hype. I want to know what makes a crypto king? What makes them successful? What leads to adoption? What barriers are in the way?
I have developed a small set of factors that I look at when evaluating cryptocurrency.
They are simple and few. Sometimes the truth lies in simplicity and clarity rather than convoluted schemes and complex explanations of a plan. Each factor above has multiple features. I’ll explain the generic definition of each of the above, and then dive into the details of them with Bitcoin, Ethereum and XRP.
The (micro) Lindy Effect
Before I get into the Lindy Effect, I have to admit that its usefulness is next to nothing. It is an interesting heuristic though and useful when looking at something as “standing the test of time”. I will propose below that it may be useful on a micro-scale, despite that mathematically, the Lindy Effect makes no sense.
The Lindy Effect is defined as: the future life expectancy of a non-perishable thing (i.e. an idea, or technology) is proportional to its current age. Meaning that the older something is, or the longer its been around, it is expected to be around longer than newer concepts or things. This only applies to non-living things as we know that living things age. We can expect a 20-year-old person to live longer than a 65-year-old person.
It is popularized in cryptocurrency to suggest that Bitcoin has been around for 10 years so, therefore, each passing month and year it survives contributes to its future expected longevity (i.e. success). However, using this argument we would assume that gold has a better outlook than Bitcoin. Or that SWIFT has a better outlook than XRP/Ripple. Or that Walmart has a better outlook than Amazon. I disagree.
What is it about Bitcoin that allowed it to survive for over 10 years while literally thousands of other cryptocurrencies have come and gone, never to be heard of again? Similarly, we can look at the dawn of the Internet – what qualities did Amazon, Google and Facebook have that other web-companies lagged in?
I propose that the Lindy Effect may be useful in a cryptocurrency microcosm. When looking at an industry, especially a new developing industry that goes through tumultuous ups and downs, those that survive the brutal ecosystem may have characteristics that allow it to thrive.
I’ll call this “The (micro) Lindy Effect”. And this ties more into the next 3 factors… if the next 3 factors are satisfied, you could potentially apply The (micro) Lindy Effect.
Metcalfe’s Law actually holds truer than the Lindy Effect. Also known as the network effect…
“The effect of a (telecommunications) network is proportional to the square of the number of connected users of the system (n^2)”.
– Metcalfe’s Law; George Gilder (1993)
It was characterized in this definition by George Gilder in the early 1990s but attributed to Robert Metcalfe with respect to Ethernet (the internet way back in the 1980s/1990s, not to be confused with Ethereum).
What Metcalfe’s Law refers to the usefulness and inherent value of a network. It proposes that a single user on a network is not very useful or valuable. Two users are significantly more valuable than one user. Since 1^2 =1; 2^2 =4. Now imagine 4 users on a network… 4^4 = 16. That means that four users on a network make that network fourfold more valuable than a network with only two users since 16 is four times 4.
Now imagine a network with 50 users vs. one with 600 users: 50^2 = 2,500 vs. 600^2 = 360,000. A network with 600 people is 12x larger than a network with 50 people (600/50 = 12). However, according to Metcalfe’s Law, the value of a network with 600 people is 144x more valuable than a network with 50 people (360,000/2,500 = 144).
The unit is not specified and not relevant. Metcalfe’s Law is a generalization of the comparative value of networks based on their size. The meaning is that networks are exponentially more valuable as they grow in the number of users.
We witnessed a similar phenomenon with telephones. They were not very useful when only 10 people in town had them decades and decades ago. However, when there was a landline in every home, telecommunication companies (Telus, AT&T, Rogers, Bell, etc) were some of the most valued companies around. A similar phenomenon occurred with fax machines, email, and then the Internet.
A popular example of Metcalfe’s Law at work is Facebook and other social media platforms (Instagram, Twitter, Tumblr, Snapchat). The more users/profiles on the social network exponentially increase the value of that network. Facebook had 1.7 billion mobile active users in 2016. No wonder it has a market cap of $430 Billion USD.
Metcalfe’s Law could potentially also be applied to fiat currency. The more users of a particular currency the higher the value and liquidity. One of the reasons the U.S. Dollar is so valued globally is because it is by definition the world reserve currency and all international transactions are settled in USD (for now).
Metcalfe’s Law is especially applicable to cryptocurrencies. Just as I described above with the $USD, the network effect will literally give value to cryptocurrency. The more users of cryptocurrency there are, the more successful cryptocurrency will become. Also, the more liquid the currency will be which provides ease of use. Moreover, cryptocurrencies include an element of social movement to them. The social networks that develop around open source cryptocurrencies are critical to their survival and durability.
This combined social movement and monetary value and liquidity will make cryptocurrencies some of the most valued assets in human history. In an open-source world, a technology needs developers to continually adapt, leading us to our next point: Darwinian Robustness.
Darwinian Robustness (Adaptability)
This is a factor that I coined. Although not entirely original, adaptability plays a huge role in the success of a technology, corporation, cryptocurrency, political party, medical sciences etc. Paraphrasing Charles Darwin, only those who adapt will survive to the next generation. The world is like a jungle of survival of the fittest. Especially the business world and anything that is connected to money or actual survival/quality of life (which is pretty much absolutely everything).
For example, Blackberry did not adapt to buttonless phones/touchscreens (or at least not soon enough). I’ve seen one blackberry product in the last decade. Blockbuster did not come out with an online streaming platform with all your favourite movies in response to Netflix. We all know how that ended. Walmart (and all brick and motor retail) laughed at Amazon. Today Amazon is one of the largest companies ever to exist, with its founder being one of the richest men to walk the Earth. You get the idea.
On the contrary, many companies did manage to adapt:
- Telecommunications companies such as AT&T, Telus, Bell and Rogers (the main American and Canadian telecom companies) adapted from phone lines to being internet service providers. Today, many are also adapting their cable packages to online streaming services to compete with Netflix.
- The lowkey Berkshire Hathaway, one of the largest conglomerate companies and run by Warren Buffet (one of the richest men in the world) began with a Textile Mill that was shut down in the 1980s and the company refocused on still traditional, but time-tested, robust companies. Today it has a market cap of half a trillion dollars ($500 Billion USD).
- Nokia has been around since 1871, beginning as a paper mill in Finland, it adapted to a rubber manufacturer of tires and boots, which were very popular. Then in the 1960s/1970s Nokia again reinvented itself as an electronics producer producing commercial radio phones, car phones and cell phones. By 1990 it abandoned its other business streams focussing solely on cell phones and was the world’s top cell phone provider for a consecutive 14 years (1998 to 2012).
- Western Union originated in the mid-1800s (~1851) as a telegraph company. By 1929 it was one of the most successful telegram companies in the world. We don’t send telegrams anymore, but we do still have Western Union. It adapted to include fax machines and services in the 1930s, then email in the 1980s and still holds its place as one of the world’s largest money transfer services.
We still have companies that adapted, and we do not have companies that failed to adapt. Technology can be robust and adapt too. The Internet used to be unable to support sending large files via email, even pictures. I am in my late 20’s but I remember having to send 8 different emails if I wanted to send 8 photos because the internet simply could not handle and email the size of 8 (rather poor quality) photos. When you used to scroll down on a website you would have to wait for the new content to load… literally reading a blog post like this would require you to scroll and then allow the screen to load before you could continue reading.
Today we can live video chat from London, England to Sydney, Australia with barely any lag at all. That is significantly more data than text loading on a static web page. The technology behind the Internet adapted and scaled. The internet today is not the Internet from 20-30 years ago.
This Darwinian Robustness feature applies to the cryptocurrency industry. No cryptocurrency is perfect. Some will have scaling issues, others will have decentralization issues, others will have adoption issues or trust issues or liquidity issues. The point is, a successful cryptocurrency will have teams and community support around them that allow them to adapt. Those stagnant cryptocurrencies will fail. Those with continued technological advances will thrive.
Multi-Purpose, Not Niche
This success factor mostly applies to cryptocurrency, although it can be used for a few other examples. I’ve noticed many “niche” coins out there. They almost seem more like reward point system like AirMiles more than an actual cryptocurrency. In my opinion, this does two things: (i) by defining a niche it inherently limits itself; (ii) actually makes things more difficult/complicated rather than easier.
A few good examples… If we went back in time to the 1990s or early 2000s, I’d rather have a machine that is a scanner, printer, photocopier and fax machine all in one, rather than having 4 different machines in my office.
Similarly, its nice to have the latest smartphone (iPhone, Pixel, or Samsung Galaxy, etc) that can function as a phone, laptop, music player, wallet (Apple Pay, Google Pay, Android Pay), email, computer, ticket stub (for movies, concerts, boarding passes) rather than needing a separate laptop, iPod, physical wallet with 5 different cards in it, carrying around movie tickets and boarding passes etc.
The smartphone has revolutionalized the way we function – it is a highly multipurpose machine. NOT niche. A physical wallet is a niche. A paper boarding pass is a niche. An iPod is a niche. Two physical credits cards and a physical debit card are niches. The smartphone is not niche.
Why would I want to have a travel coin (i.e. TOA coin), grocery store coin, porn coin (yes there are several including SpankChain [SPANK], Vice Industry Token [VIT], TittieCoin [TIT], Bitcoin Adult [BTAD] and more), a coin for different exchanges (0x, Binance Coin), a coin for gas, a coin for a power network etc. That is akin to collecting grocery store points, AirMile/travel points, gas-points and having to keep them in your bank account and selectively earn and selectively spend these coins/points in their respective areas. Or having to purchase those points in order to spend them at their respective merchants. Imagine getting paid from work and specifically asking for 20% of your pay to be “gas coin”, 20% to be “grocery coin” and 10% to be one of the many “porn coins”
Just as many ICOs were defacto unregulated IPOs (aka just a stake in a company), many of these other cryptos are simply point rewards systems on a blockchain.
Now I am not saying that these Niche point-reward coins are useless. They will likely be easier to track and use than today’s current reward point system. I’m just saying that multipurpose coins will be massive, and exponentially more successful.
Would you rather gas points and gift cards or cash? I’ll take cash 10 times out of 10. Why? Because I can use cash at any gas station, not just the ones accepting the reward points. I can use cash to shop at any store, not just the one specified on the gift card.
Similarly, cryptocurrencies such as XRP, Bitcoin and Ethereum operate more like cash in that they are used and exchanged for anything and considered the digital asset equivalent of cash. Ecosystems will be built around BTC, XRP and ETH. We do not need to build a cryptocurrency for every ecosystem.
Being a niche coin is limiting. Being a multipurpose coin is limitless.
Markshire Crypto Conclusion – Factors for Cryptocurrency Success
That is my long description of the main general four factors that I think will define a cryptocurrency’s chances of success. A combination of Metcalfe’s Law, Darwinian Robustness, and Multipurpose feature will help define The (micro) Lindy Effect to project that a cryptocurrency that has been around with the other 3 qualities fulfilled will be more likely to stay around for a long time.
I will describe how the top three cryptocurrencies fit these features in future posts.
Go back to What is Cryptocurrency to learn more on cryptocurrency.
Please comment below for discussion!