Black Swan Event: The Biggest Crypto Market Risk!In today’s article, we will be discussing a risk known as Black Swan Event. Now what is the Black Swan and why it is considered as the most unexpected event in the course of any economic crisis is the greater factor to be discussed.
The most unexpected event that has the maximum possibility to occur in the market is called Black Swan, this term was first coined by NYU professor and economist Nassim Nicholas Taleb.
The main attributes that shape the possibilities of Black Swan events:
Unpredictability
Potential Severities
Widespread impact
According to Taleb:
A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.
They are impossible to predict due to their extreme rarity, yet have catastrophic consequences, it is important for people to always assume a black swan event is a possibility, whatever it may be, and to try to plan accordingly.
Some believe that diversification may offer some protection when a black swan event does occur.
Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.
Extrapolating, using statistics based on observations of past events is not helpful for predicting black swans, and might even make us more vulnerable to them.
The last key aspect of a black swan is that as a historically important event, observers are keen to explain it after the fact and speculate as to how it could have been predicted. Such retrospective speculation, however, does not actually help to predict future black swans as these can be anything from a credit crisis to a war.
What is the impact on Institutional markets?
We know that somehow, we can use normal factors of prediction and probability over mass numbers of people like the result predicting based on Normal distribution curve, for such things, even the extrapolation method is not working.
Hence Black Swan can take the market in any form that is not predefined, that can attack a market with several forms like crashing of prices and regulatory risk of digital exchanges.
What are the two different types of Black Swan risk?
Black Swan occurs within two types one is the positive impact and another one is a negative impact, now the inability to predict the accurate possibilities is the driving force behind the execution of the Black Swan event.
Any clampdown on the trading of cryptocurrencies and other digital money can directly crash the prices of other currencies.
The crackdown of Cryptocurrency exchanges by any third parties or other factors can also be counted as the Black Swan effect, many particular exogenous events can be forced to occur like:
Inverse Volatility
The crackdown of Crypto exchanges
Regulatory risk of Crypto exchanges
Low liquidity and low trading volume
Having said that, 2022 has been the year of the “Black Swan” throughout the world of cryptocurrency. From the fall of LUNA to the insolvency of 3AC, Celsius, FTX and now BlockFi, the market has taken major hits in value and credibility. Each one of these events seemingly was viewed as a once in a lifetime event.
To sum up, the Black Swan event is described in the following summarized manner:
This event is so rare that it has many unknown possibilities occurring suddenly.
Also, the impact is so huge that it can have a catastrophic effect.
The hindsight conclusion if the prediction comes as true.
Conclusion
At last, one could conclude that many events could turn into a Black Swan in crypto trading such as, Network Congestion where everyone is rushing to have Ethereum and it subsequently raises the price of gas.
In this case, when Black Swan occurs, the problem increases tenfold times and also this affects the liquidation process and also low-value transfers can simply attack the blockchain system.
If you liked it, make sure to support with a like, follow and a comment!
Best Regards, CryptoQueens.
