The financial market is a dynamic environment that goes through ups and downs in cycles. The…
The Black Swan event is not similar to Natalie Portman’s movie. It refers to a unique phenomenon in the crypto market.
This blog post will explain more about the black swan event and its impact on crypto assets.
Black Swan Event Meaning
The black swan event is an unexpected event or an extremely rare occurrence that can bring a huge impact on the financial market. It is an occurrence that brings highly unfavorable consequences to people.
Origin of the Black Swan Event
The Theory of Black Swan Events or the Black Swan Theory goes all the way back to Latin expression that came from the 2nd-century poet Juvenal.
“rara avis in terris nigroque simillima cygno”
This is a Latin phrase that means “a rare bird in the lands and very much like a black swan.” The translation was used when people first believed that black swans are not real.
Nassim Nicholas Taleb
Nassim Nicholas Taleb was the first person to coin this phrase. Taleb worked as a finance professor and Wall Street Trader. In his 2007 book, entitled The Black Swan: The Impact of Highly Improbable, he described the black swan event as something that is impossible to predict but has catastrophic consequences.
Three Features of a Black Swan Event
According to Taleb, the black swan has three hallmark characteristics.
First, the black swan is an anomaly. It exceeds normal expectations and there are no indicators in the past that could have helped predict it.
Second, it leaves a solid and long-lasting impact.
Third, since it is an irregularity that cannot be predicted, it can be explained only after its first occurrence. As a result, experts can predict future events that possess similar patterns to the data that they gathered.
Black Swan in Cryptocurrency
A risk that is not often acknowledged or discussed is the likelihood of a black swan event happening in the cryptocurrency space.
For example, a government’s crackdown on crypto trading and cryptocurrency exchanges can bring about a black swan event. Another term for this is regulatory risk and it causes market crashes to occur.
This happened to Ethereum when its trading volume became spread out to Japanese and South Korean crypto exchanges due to China’s crackdown on cryptocurrencies that started in 2017. Back in 2016, Chinese crypto exchanges held more than 90% of ether in their trading volumes.
Another cryptocurrency that carries the same risk is Cardano. South Korean crypto exchanges trade the ADA coin exclusively. For instance, Upbit had 70% of Cardano’s general trading volumes in 2019.
Just a single glitch or error in the exchanges can cause a catastrophic crash in Cardano’s prices. Fortunately, Justice Minister Park Sang Ki announced that their government was already crafting a bill to prohibit crypto trading on crypto exchanges.
Year of the Crypto Black Swan
Many crypto enthusiasts and experts agree that 2022 was the year of the black swan event. It started with the decline of LUNA, followed by Celsius, FTX, and 3AC becoming insolvent and just last December 2022, Blockfi also took a hit.
Notably, the crypto market really went through a difficult time because the Federal Reserve continued to be stringent in its monetary policies. In addition to that, their interest rates also frequently increased. These affected not only the institutional markets but the cryptocurrency markets as well.
How to Deal with a Black Swan Event
Since this kind of event is highly unpredictable, it seems that there is no way to prevent it from happening. So, how do you frame your mindset to prepare for a devastating financial phenomenon like this?
First, you need to recall and acknowledge all the expected patterns in the crypto market and then rule out the deviations. In this method, one needs to use positive patterns and predicting that it will continue as such.
Second, you can try to think of all the extreme and unpleasant scenarios that may happen. When you do this, you evaluate all the possible results and influences of the extraordinary events. If their collective effect can be devastating, it may be a black swan event.
While there is no surefire way to prevent a black swan event from happening, you can still take precautionary steps to protect yourself and your investments. Always have your risk management strategies ready and make sure that you regularly update yourself with the crypto trends that are happening.
A well-informed investor is a well-protected investor.