What Is a Black Swan Event?
A black swan event is an unpredictable, unlikely occurrence that can start extreme market reactions (usually crashes) almost overnight.
These often catch traders by surprise since there’s usually no way to anticipate them with any form of analysis. This doesn’t mean they’re random, though. After the fact, there’s much more clarity as to how it happened and how to predict similar ones.
The “black swan” events are retrospectively predictable, and it seems to researchers that they had an opportunity to predict their advent.
Igor V.P.
Defining Features of Black Swan Events
By definition, black swan events show these traits:
- Short-term volatility. Both traditional and crypto markets will likely see big falls, even when the projects and companies behind them are successful
- Unprecedented. There’s almost no historical data of these events to be predicted from experience
- Impactful. Even the most unrelated and remote disasters can reflect on cryptocurrency prices
- Systemic risk. Black swan events can cause widespread disruption and quickly spiral to bear-market prices
Black Swan Event Examples
Both crypto and global market events can define black swan events. Some examples include:
- The global financial crisis (2007)
- COVID-19 pandemic (2020)
- The China Crypto Ban (2021)
- The Russian invasion of Ukraine (2022)
- The Collapse of Celsius Network and FTX Exchange (2022)
In the last example, Bitcoin fell from a stable $40,000 to $21,000 in less than a month. The collapse chained into many other bankruptcies and smaller incidents, leading to a six-month decline to $16,000. Only after ~14 months did crypto markets start showing signs of recovery (October 2023).
Repercussions: What Does a Black Swan Event Mean?
The black swan event’s meaning is often synonymous with losing money. However, if investors believe markets will recover, then buying after this event can be a great opportunity (as well as short-trading before it).
Traders should expect:
- More price volatility. If the event is severe, any uptrend after it will likely be short-lived
- General panic and distrust. Once it’s clear that high prices won’t return in a while, holders may prioritize cutting losses.
- Regulatory scrutiny: In the case of cyber-attacks or exchange failures, governments may investigate and impose more restrictions on other crypto platforms. This can reduce user adoption and trading volume.
- Unresponsive trading: Even with good market timing, exchanges make it impossible to stop losses. Maybe the network fees are too high, or the exchange doesn’t fill the orders, or withdrawals are unavailable.
Conclusion
Black swan events come in the most unexpected forms, with the illusion that next time it will be obvious. However, the only way to prepare for them is to set up portfolios as if they were to happen. Long-term investors shouldn’t over-rely on a single token, platform, or strategy to manage this risk.
Ponkin, I. V. (2019, March). (PDF) ”Black swan” event as a manifestation of uncertainties in public administration. Researchgate.net. https://www.researchgate.net/publication/332195055_Black_Swan_Event_as_Manifestation_of_Uncertainties_in_Public_Administration
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