KEYTAKEAWAYS
- Black Swan events are rare, unpredictable, and cause significant economic impact across sectors, including crypto.
- Notable examples include FTX and Mt. Gox bankruptcies, highlighting severe market vulnerabilities.
- Diversification, self-custody, and risk management strategies are essential in preparing for Black Swan events.
CONTENT
A Black Swan event is an unpredictable, rare event with massive consequences. Learn its characteristics, past crypto examples, and how to prepare for these market shocks.
WHAT IS BLACK SWAN IN CRYPTO?
A “Black Swan” refers to an extremely rare and unpredictable event. These events typically have a massive impact and, once they occur, can lead to catastrophic consequences. Black Swan events are particularly feared by every economy, especially in the stock and cryptocurrency markets.
Traditional statistical and risk models cannot effectively capture such extreme events because they are based on historical data, and Black Swan events have never happened before, making them impossible to predict accurately.
The 3 main characteristics of Black Swan events are:
✔ Extremely difficult to predict: Their occurrence falls far outside the normal range of expectations.
✔ Severe consequences: They have a profound impact on the economy and financial systems.
✔ Hindsight explanation: While hard to predict beforehand, after they happen, clear explanations and potential preventive measures often emerge.
>>> More to read : 4 Most Common Crypto Scams And How To Avoid Them
BLACK SWAN EVENTS IN CRYPTO HISTORY
1. FTX Exchange Bankruptcy
One of the most notorious and memorable Black Swan events in the crypto space was the sudden bankruptcy of the FTX exchange. Allegedly, the exchange was using customer funds for directional trading.
When this news broke, users rushed to withdraw their funds, causing the market to collapse. To this day, FTX still owes billions of dollars to its users, severely damaging trust in the crypto market.
2. Mt. Gox Bankruptcy
This is one of the largest cryptocurrency thefts in history. In 2014, Mt. Gox, the world’s largest cryptocurrency exchange at the time, was hacked for 850,000 Bitcoin and subsequently declared bankruptcy.
Mt. Gox held over 80% of the market share at the time, impacting the majority of Bitcoin holders. Even after many years, the effects of the Mt. Gox incident persist, with compensation claims still being raised nearly every year, though with little progress made.
3. COVID Crash
The global coronavirus pandemic had a significant impact across industries, and the cryptocurrency market was no exception. Bitcoin saw a 50% drop in value in a single day, and the total market capitalization of cryptocurrencies fell by 40%.
This event highlighted the severe impact the pandemic had on the crypto market and prompted investors to reassess the risks associated with crypto assets.
>>> More to read : What is Blockchain and How Does It Work?
HOW TO PREPARE FOR A BLACK SWAN EVENT
While Black Swan events cannot be predicted, you can still prepare in advance.
For example, allocating 100% of your assets to cryptocurrencies, NFTs, or crypto-related public companies carries significant risk. Diversifying your portfolio into other financial markets can help reduce exposure to crypto-specific Black Swan events.
Some traders also keep a portion of cash as “dry powder,” ready to deploy after a Black Swan event to take advantage of lower prices.
Additionally, it is wise to consider self-custody for at least part of your crypto portfolio. This can minimize the risk of losing funds if exchanges or platforms are compromised.
-
Managing Risk and Volatility During a Black Swan Event
How an investor responds to a Black Swan event largely depends on their investment goals.
Historically, Black Swan events in the crypto space have often triggered multi-year bear markets, with cryptocurrency prices trending downwards over an extended period.
Attempting to time the market is not advisable. Correctly identifying the “bottom” is highly unlikely and could result in further losses or unfavorable positions.
Additionally, if a Black Swan event leads to a long-term bear market, popular assets today may never recover due to shifting narratives and emerging technologies.
That said, savvy investors can still make smart decisions post-crash. Dollar-cost averaging into crypto assets with strong fundamentals (like Bitcoin and Ethereum) can be a worthwhile strategy, helping to smooth out price volatility if and when the market recovers.
-
Conclusion
Black Swan events can be overwhelming and may lead to significant losses in your portfolio. However, staying calm and proactive is crucial. How you handle these events will determine whether you survive the storm or become one of its victims.
Understanding Black Swan events and the reasons behind them is the first step toward being prepared. Traders should implement strict risk management, diversify across multiple markets, and always keep a portion of their portfolio in cash to seize opportunities during unpredictable, catastrophic events.
Good luck! Let’s hope we won’t encounter a Black Swan event.
