Black Swan Event

What Does a Black Swan Event Mean?

The theory of black swan is an analogy that is used to explain the possibility of an unexpected event occurring with a major effect and is often rationalized as something anticipated in retrospect.

Proposed by Nassim Nicholas Taleb – a professor and mathematical finance researcher, and popularized through his book The Black Swan, black swan events take on the following characteristics:

1. They are rare occurrences with nothing in the past to predict it.
2. They come with a severe impact when they happen.
3. Although unpredictable, they are given explanations after it happens to make it seem like they were supposed to happen.

A black swan event can be negative or positive for the crypto industry. The purpose of understanding this phenomenon is to be fully equipped with systems that are optimized to absorb negative black swans while riding on the benefits of positive ones.

The Crypto Market and Previous Black Swan Events

As with other financial markets where black swan occurrences have significant market effects, the crypto market has experienced its fair share of some negative ones.

An example of a general world happening pandemic that affected the crypto industry was the COVID-19 pandemic. Other macroeconomic factors like wars and geopolitical regulations can cause a major swing in the crypto market prices.

As crypto is highly volatile by nature, a black swan event typically causes a severe fluctuation in the prices of cryptocurrencies. The following are examples of black swans in crypto:

1. Mt. Gox hack: The most impactful black swan event in crypto was Mt. Gox hack, accounting for over 70% of all Bitcoin transactions at peak. It operated between 2010 and 2014. Mt. Gox got hacked with hundreds of thousands of stolen Bitcoins in February 2014. This was the first security breach with a market-altering consequence.
2. Terra blockchain UST depeg: The algorithmic stablecoin developed on the Terra chain called UST lost its peg to the dollar in May 2022. This unfortunate event caused a wiping out of about $200 billion in the crypto market capitalization in a day. UST at its peak was the most valuable algorithmic stablecoin. The rapid growth of the ecosystem made most people less vigilant about the possible crash of Luna, Terra’s base token.

Source: Coingecko

Other Notable Events

Since exchanges have failed or have been hacked before, some other impactful situations are not black swan events but deserve to be mentioned because they had significant market effects like a black swan would.

Examples are the FTX Exchange collapse and the lost coins in the QuadrigaCX founder’s death.

What To Do About Black Swan Events?

Diversify your crypto portfolio: Spread your crypto holdings across tokens of different asset classes to mitigate risks that can devalue your portfolio significantly. This also gives you a chance to benefit from the potential uptrend of an asset in case of a positive black swan event.

Black swan events are not frequent, but they are highly significant as they can impact the lives of users, traders and investors in the crypto industry. All active participants should stay up-to-date with the latest developments to make the best possible decisions.

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