Positioning Yourself to Benefit From the Collapse

One of the simplest ways to both protect yourself and to even potentially grow rich is to position yourself to benefit from the eventual collapse of fragile establishment companies, projects and systems.  Here’s a relevant maxim:

“Any centralized, optimized system is inherently fragile and anti-fragile systems (like evolution) are never centralized or optimized.  Seek strategic opportunities to survive/exploit the eventual collapse or failure of optimized systems.  Likewise seek opportunities to exploit the long term success of anti-fragile systems, especially those benefiting from network effects.”

When Collapse?

It’s impossible to say exactly when, how or why any given centralized or optimized company, project or system will collapse, but they always do, and every person will typically experience multiple such collapses during his or her lifetime. Positioning yourself to avoid harm from them, or perhaps even to benefit, is therefore essential.

Our present generation is a bit unusual since it has already seen two systemic collapses in the last 25 years (the bursting of both the tech and real estate bubbles), and we are presently poised for an eventual third (the bursting of the Everything Bubble, which will likely be facilitated by blockchain technology).

One of the easier ways to position yourself to benefit successfully from the collapse of fragile systems is to identity potentially disruptive technologies (like blockchain) in their very early stages (and yes, with blockchain adoption presently at 2.5% or less, we’re still way early). And, for various reasons, identifying such technologies is easier to do if you limit your search to only those technologies that, like blockchain and social networks, grow exponentially and enjoy network effect advantages.   

There are two main ways to potentially benefit by identifying these disruptive technologies very early. 

Pick the Winners

One is to place small, early bets on the new technology itself.  For instance, anyone paying any attention should have been able to see pretty early that digital cameras would eventually improve in cost and quality to a point sufficient to replace film cameras en masse.   Investing a little bit (and it only takes a little bit at that stage) very early in companies likely to benefit from the digital camera revolution seems like a no brainer opportunity in hindsight.  

And...it was, though few capitalized on it.

But Picking Winners is Hard

There are several challenges with trying to invest directly in any new disruptive technology.  The first is that most promising new technologies won’t actually pan out (to paraphrase another maxim, you’re going to be wrong about these things far more often than you’re right).  Second, it’s hard to know which exact companies will prove to be the winners in implementing the new technology.  So, you can easily bet on the right tech but pick the wrong company and still do very poorly (this happens often in biotech, for example).   

Third, securities laws are rigged against most people.  Investing in new technology at the very early stages is typically limited by law to “accredited investors” (aka, “rich people”). By the time these disruptive companies become available to the general public via an an “initial public offering”, much of the potential gains have already accrued to the original rich investors.  So, even if you are successful in picking the right tech and the right company or project (no small feat), you still may be prohibited from investing unless you’re rich.  

(Note that the blockchain space is one area where Average Joes have been able to get in early and benefit immensely because the most important cryptocurrencies and tokens are often not “securities” and so are not subject to the accredited investor rules)

Picking the Losers

A second way of benefiting from the eventual collapse of centralized/optimized systems, and one that does not suffer all the disadvantages and challenges just noted, is not to try to bet on the disrupting winners but rather to bet against the eventual disrupted losers.   For instance, rather than trying to determine which companies would eventually benefit most from the digital camera revolution, one could have instead sought to determine those companies that were most likely to be harmed the most (e.g., Kodak) and position oneself to benefit from their eventual demise.   

To give another example, rather than betting on specific blockchain projects hoping you successfully pick the winners, instead perhaps seek to determine which companies and industries are most likely to be disrupted by blockchains and find ways to benefit from their declining relevance.   The great advantage of this approach is that you don’t have to guess which new company or project will be the winner, only which companies or industries will be the losers, and that’s significantly easier.  It’s easier because the old, fragile companies will be disrupted regardless who who the exact new winner is.  

Timing is Everything

However, if we take the approach of betting against the losers, timing is critical.   It can often take longer than one anticipates for the new technology to really reach its disruptive potential.  To give just one example, I’ve been talking about blockchains now for ten years (!!), and they are still a year or three away from really starting to disrupt centralized, optimized establishment systems and organizations.   

But, if you arrive too late, most of the damage to the establishment will have already been done and you’ll not be able to adequately benefit.   

In short, if you’re going to bet against the establishment, you definitely don’t want to be too early nor too late.  That’s the tricky part.  

Fortunately there is a aid to timing that can help, at least with certain types of disruptive technologies—again, those benefiting from exponential adoption and, among those, especially those benefiting from network effects.   

The S-Curve Tells You When

Plotted on a line graph, adoption of new exponential technologies typically creates an “S curve”.   Absolute adoption starts off low and slow (because the tech is brand new and you’re doubling from a very low base).  As a result the plotted line on your graph is fairly flat but angles slightly up and to the right over time.  

But eventually you reach the “knee of the curve”, the point at which subsequent doublings in adoption really start to add up in absolute number terms.  At that point the curve on the graph then begins to accelerate steeply upward and to the right.  And then as we approach the saturation point, the adoption rate slows once again and the curve flattens again.  The result is an “S” shaped adoption curve.  

The key insight here is that establishment companies don’t really start to be disrupted by the new tech (or otherwise give it much attention at all) until the knee of the curve is reached, and that happens at about the third doubling after adoption has reached 1%.  And three doublings from 1% is 8% (2 —> 4 —> 8).  

So, the time to position yourself to benefit from the demise of fragile/centralized/optimized establishment companies is therefore once adoption of the new disruptive technology reaches about 8% to 10% penetration.  (Note that this 10% is also the point that Malcolm Gladwell famously identified as the “tipping point” in his excellent book by the same name).  

Although some new technologies fizzle after achieving 10% adoption, most that are going to fizzle do so well before that.  Thus, by waiting until 8% to 10% adoption before trying to position yourself to benefit from the demise of the fragile establishment, you greatly reduce the odds of betting too early.  

Where are We on Blockchain Adoption?

It’s difficult to estimate current adoption of blockchain technology, but most estimates range from 1% to 2.5% worldwide. Importantly, however, blockchain adoption is occurring very rapidly, doubling approximately every six to twelve months.  This high rate of adoption has two important implications.  

First and foremost, it means that, if the trend continues (as I expect it will), we’re only 18 months to 36 months (give or take) from reaching the “knee of the curve”, the tipping point at which the new technology just starts to disrupt the establishment companies en masse.  

And then we’re only a couple years from there (so, say...five years away from the present at most) before its impact becomes absolutely devastating on the establishment.  

Second, the very fast doubling in adoption, if it continues (as I expect it will), means that establishment companies are going to have a very, very short window to save themselves (by reworking the new technology into their business models).  If history is any guide, most of them will not do this quickly or well enough (think Kodak) and will therefore perish or become much less relevant, seemingly almost overnight.

Conclusion

In short, between 18 months from now and 36 months from now may be an ideal time to position oneself to benefit from the blockchain disruption. And now is the time to start planning how to do so.