The cryptocurrency market is inherently unstable and volatile, yet it manages to stay afloat and steadily strengthen its position thanks to rapid development and progressive technologies. The market is built on the appealing idea of decentralizing the financial system, which attracts young developers and advocates of the new digital economy.
However, as modern business practices have shown, even advanced policies can fall into the same old traps. This article discusses the widely known “survivorship bias.”
Understanding Survivorship Bias
The concept of survivorship bias gained prominence thanks to Hungarian mathematician Abraham Wald, who studied the damage statistics of military aircraft during World War II. The U.S. government tasked Wald with reducing the loss of bombers. To do this, he needed to study the situation comprehensively and find a new solution since old strategies had failed.
The military logically concluded that they should reinforce the parts of planes with the most bullet holes. However, Wald was the first to suggest looking not at the surviving planes but at the ones that were shot down. He noted that it would be more effective to reinforce the parts of the bombers that were not hit — if those parts had been hit, the planes likely wouldn’t have returned.
Wald’s theory led to a rethinking of wartime engineering approaches. Furthermore, his innovative idea of studying the failures rather than the successes changed perspectives on logical reasoning, data analysis, and objective evaluation.
In various social and economic fields, “survivorship bias” refers to the error of making incorrect or biased conclusions based on a flawed selection of data. This data distortion is common in medicine, military affairs, and especially in economics.
How Cryptocurrencies Are Linked to Survivorship Bias
The cryptocurrency market is directly affected by survivorship bias. The market is characterized by instability and high volatility. In such conditions, drawing fair conclusions about the success of one strategy over others is erroneous due to numerous minor influencing factors.
Besides the high volatility of the crypto market, there are several other reasons why survivorship bias has become prevalent in this area.
- Misrepresentation of information about cryptocurrencies
Consider an example based on recent data. From 2014 to 2023, the total market capitalization of cryptocurrencies increased to $1.8 trillion. This substantial number might suggest a stabilizing market for decentralized digital assets, making it appear as a favorable and safe investment environment.
However, another perspective is essential. At the beginning of 2024, analysts from CoinGecko reported that over 50% of the cryptocurrencies they tracked ceased to exist within the same period (more than 14,000 projects out of over 24,000 failed). With this data, confidently asserting the market’s safety becomes challenging.
Focusing solely on successful projects without acknowledging the failed ones is an example of survivorship bias.
- The rise of meme coins
The excessive attention given to meme tokens in recent years also distorts the overall picture of the crypto market. Newcomers to the industry might assume that any “joke” project will be in demand due to the current trend. Debunking this myth, which stems from survivorship bias, requires full statistics. One must consider both successful and failed projects, studying the reasons for their downfall alongside the reasons for their competitors’ success. Often, success is tied to luck and may be short-lived, while failure is based on more objective reasons.
- Low entry barrier
Today, anyone with internet access can work with cryptocurrencies. The mechanics of launching a crypto startup are relatively simple, with instructions readily available online. This accessibility can create the illusion of easy and quick profits without the need for extensive training or reputation-building. While stories of newcomers whose projects succeeded due to innovative ideas exist, basing conclusions solely on these instances is fundamentally flawed.
Conclusion
Market analysis involves studying numerous factors, many of which are not immediately apparent. It often requires examining events from a decade or more ago, comparing the experiences of different companies, and listening to seasoned experts’ opinions.
The cryptocurrency market has an even more complex structure than traditional finance. As a young space, it needs time to calm and stabilize.
Survivorship bias in crypto markets can work both ways:
- Creating an illusion of a space where any idea can succeed, making profits on trends, and earning passive income.
- Or, conversely, presenting an unsafe, incomprehensible, and unstable market that could collapse at any moment, leaving investors without money.
Neither of these extremes is accurate; the truth lies somewhere in between. Undoubtedly, the crypto market is progressive and promising. It attracts technologies, significant investors, top developers, and enthusiasts, all driven by the clear idea of developing digital decentralized systems and free trade.
If you want to learn more interesting facts about crypto then check out our blog! You might like our articles “Unleashing the Hype: Why Dog-Themed Memecoins Remain Popular” and “Monero vs Ethereum: Which Crypto Offers Better Profits?”.
Originally published on our Publish0x blog.
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Crypto and “Survivorship Bias”: How Others’ Success Can Skew the Bigger Picture was originally published in The Dark Side on Medium, where people are continuing the conversation by highlighting and responding to this story.
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