In the market, there are sometimes events that cause extremely serious and catastrophic consequences. They are known as "black swans." A black swan event is an unforeseen and extremely rare event that has severe consequences. It often inflicts significant economic damage and is difficult to avoid. Although it is nearly impossible to predict, in hindsight, the consequences of a black swan event often appear obvious or inevitable.
Contents:
- How Does a Black Swan Work?
- Why is it Called a Black Swan Event?
- Impact of a Black Swan Event on the Cryptocurrency Market
- Is it Possible to Anticipate a Black Swan Event and Be Prepared for It?
How Does a Black Swan Work?
Black swan events come in various forms and sizes, from the housing market crash in 2008 to World War I. What do these unexpected events have in common? There are three defining characteristics that must manifest for a black swan event to occur:
- Statistically Improbable: A black swan event is always a statistical anomaly. The probability of it happening is low, and in the past, there may have been countless instances where similar conditions did not lead to such events.
- Has Extreme Impact: When a black swan event does happen, it has a tremendous impact on the surrounding world. This impact can be positive, but in most cases, it is catastrophic.
- Retrospectively Explainable: Despite the unexpectedness of black swan events, people may later realize that such extraordinary occurrences could have been predicted. Looking back, it becomes clear that black swan events do not arise from random chance but represent a logical sequence of events.
Why is it Called a Black Swan Event?
This term gets its name from the book by options trader Nassim Nicholas Taleb. In his 2007 work titled "The Black Swan: The Impact of the Highly Improbable," he explores statistical fluctuations and their influence on the economy.
This real-life lesson effectively illustrates the principle that came to be known as the Black Swan theory. There was no evidence that black swans were impossible, but people's experience and biases led them to make false assumptions about how the world is structured. Similarly, investors can use flawed reasoning to profit successfully for decades, and yet unexpected and unpredictable events can occur, disproving their strategies and causing serious consequences.
Impact of a Black Swan Event on the Cryptocurrency Market
Four black swan events that have affected the cryptocurrency market can be identified.
FTX BankruptcyOne of the most notable black swan events of 2022 was the collapse of FTX. The cryptocurrency exchange faced legal troubles, internal instability, and an SEC investigation. The market crashed as panicked users attempted to withdraw their funds from the exchange, and many FTX users were unable to recover all of their money before the exchange shut down. Currently, industry experts predict that FTX still owes money to millions of users, despite returning $7 billion.
Not all unexpected events automatically lead to catastrophic consequences. Sometimes a black swan event can have positive outcomes. A good example is STEPN, an application that allows people to earn cryptocurrency through workouts. Due to the impact of unlikely events like the COVID-19 pandemic, the project in the Move-To-Earn genre went from a minor player in the cryptocurrency world to an influential player with billions of dollars invested in the industry.
LUNA, USTC, and BTC CollapseDue to the interconnection between certain cryptocurrencies, unpredictable events can cause the failure of multiple coins simultaneously. In May 2022, a user of Terra, holding a massive amount of UST (now known as USTC), sold all their coins. This led to the collapse of UST capital, and users started transferring funds into stablecoins.
Unfortunately, as users exchanged their LUNA tokens, they increased the supply of LUNA, leading to a decrease in its overall value. Additionally, the reserve funds for LUNA were held in BTC, so when Terra attempted to stabilize, massive sell-offs of BTC caused an even greater decline. As a result, Terra collapsed, and within a week, its market capitalization decreased by $45 billion.
Cryptocurrency Black ThursdayOf course, no list of notable black swan events would be complete without mentioning the COVID-19 pandemic. In March 2020, cryptocurrency markets worldwide crashed amid widespread panic about the new virus. Just a day after the World Health Organization officially declared a pandemic, the price of Bitcoin plummeted by almost 50%.
Other cryptocurrencies soon followed suit, and the market capitalization dropped by 40% in a single day. For some investors, this meant financial ruin. However, others were able to acquire valuable cryptocurrencies at very low prices, which ultimately led to significant growth in their portfolios when the markets recovered.
Is it Possible to Anticipate a Black Swan Event and Be Prepared?
Black swan events are an inevitable part of the cryptocurrency market. They can be catastrophic, but they can also present opportunities. The key is to be prepared for them and have a strategy in place in case they occur.
The most important thing to remember about black swans is that they are unpredictable. It is impossible to know when and where they will occur and what exact consequences they will bring. However, by being aware of them and understanding how they work, investors can be better prepared for them and potentially even leverage them to their advantage.
In the end, black swan events serve as a reminder that the cryptocurrency market is a place where unexpected and dramatic changes happen. It can be both frightening and exhilarating, but it is what makes cryptocurrencies unique and attractive to investors worldwide.
