Analytical Report: Leveraging the Lindy Effect in Investing

 

What is the Lindy effect and how to use it in investing?

forklog.com

4 min

January 26, 2024

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What is the Lindy effect?

The Lindy effect (law) is a theory according to which the expected duration of a phenomenon's existence is directly proportional to how long it existed before. The pattern was first discovered on Broadway, where productions that lasted 100 days on stage could most often count on the same length of “life” in the future (if a show runs for 200 days, it is predicted to have the same amount of time).

The theory is credited to financier Albert Goldman, who published the article “Lindy's Law” in The New Republic in 1964 . He suggested that the length of comedians' successful careers depended on the number and frequency of their public appearances.

This effect was later taken up by IBM mathematician Benoit Mandelbrot, who mentioned Lindy's law in his 1982 book , The Fractal Geometry of Nature. Nowadays, the theory was popularized by the writer Nassim Taleb. He described Lindy's Law in his 2012 book Antifragile.

“If a book has been in print for forty years, I can predict that it will be in print for another forty years. However, and this is the main difference from deteriorating phenomena, if a book begins to be republished ten years later, it can be predicted that it will be republished half a century later. That is why things that surround us for a long time, as a rule, do not “age” like people - they “age” on the contrary. Each year that a thing manages to survive doubles its life expectancy,” writes Taleb.

In this form, the theory has become the most popular for use when investing in ideas, products and assets.

How do investors use the Lindy effect?

In investment activities, the Lindy effect serves as a kind of quality mark - “time-tested”. If we apply Taleb's assumption about books to the assets of companies, we get the following: the longer a company "lives", the higher the chances that it will "survive" in the future.

For example, if financial giant JPMorgan has been around for over two centuries, it is much more likely to be around for the next 10 years than Coinbase. Conversely, the closure of Coinbase in the next 10 years can be predicted with much greater certainty than the bankruptcy of JP Morgan.

As an example, let's look at the capitalization data of the 10 oldest public companies.

Data: Stock Analysis.

It is logical to assume that old companies have strong connections at all levels, the best experience in building a business, recruiting personnel and choosing development vectors. Although Lindy's Law does not guarantee higher returns when investing in older companies relative to young ones, there is evidence that this strategy works in the long term.

Analysts at Market Sentiment conducted a retrospective analysis of a strategy of investing $100 in companies that are more than 100 years old, comparing it with investing the same amount in assets from the S&P 500 index.

Experts found that from 2000 to 2023, Lindy shares increased by 676%. During the same time, the S&P 500 index returned only 386%.

Data: Market Sentiment.

Using the Lindy effect, investors predict not only the “survivability” of a particular company, but also technological and other trends. For example, if Web3 social networks do not take off in the next five years, then they are unlikely to continue to exist in the next decade.

How to apply the Lindy effect to Bitcoin?

If we refer to Lindy's Law, the first cryptocurrency is no different from other technology trends. However, it is worth considering that Bitcoin has already taken root all over the world.

For example, the approval of a spot Bitcoin ETF could signal the eventual acceptance of digital gold by the global financial community.

Therefore, the Lindy effect for BTC should be considered from the point of view of the stable development of the first cryptocurrency. If Bitcoin has been able to “survive” over the past 15 years, then it will likely continue to exist in the next 15 years.

How to apply the Lindy effect to altcoins?

While Bitcoin looks very resilient, the altcoin market is not.

Analysts often note the cyclical nature of cryptocurrency prices. This is believed to correlate with the approximately four-year periods between halvings on the Bitcoin network.

According to CoinGecko statistics , more than 50% of all cryptocurrencies listed on their platform have ceased to exist. According to the service, 14,039 projects have died since 2014, and those launched during the 2021 bull market suffered the most.

It may follow from this that in order to apply the Lindy effect to altcoins, it is worth considering only those tokens that have “survived” at least two Bitcoin halving cycles, that is, about eight years.

Therefore, if some altcoin lasted, for example, four years, this does not mean that it will live for the same amount of time. And if it was able to survive on the market for eight or more years, the likelihood that it will be quoted in the future becomes higher.