- The Black Swan Event has three characteristics; very rare, having a catastrophic impact, and being easy to rationalize.
- It cannot be stopped, but a person can be prepared for the Black Swan Event by diversifying his portfolio, continuously learning, and investing smartly.
Provide a short introductory paragraph here.
What Is the Black Swan Theory?
The Black Swan Theory in the form of an event was described by a trader, Nassim Nicholas Taleb, in his 2007 book titled “The Black Swan: The Impact of the Highly Improbable,” before the 2008 financial crisis. It explored statistical outliers and their effects on the economy. The book said that people believed in the presence of only white swans because they had never seen a black swan.
But the belief was destroyed when Europeans visited Australia and saw a black swan in the lake for the first time. This questioned their belief that the whole swan breed is white. This discovery has since led to the categorization of any unexpected and seemingly implausible event, from the 2008 real estate crash to World War I, as a “Black Swan Event”.
There are three defining characteristics of a Black Swan Event; statistically unlikely (very rare), has an extreme impact (catastrophic impact with disastrous consequences), and is easy to rationalize (predictability is explained in hindsight).
Examples of a Black Swan Event
There are many examples that prove the Black Swan Theory, such as the financial crisis of 2008, the dotcom bubble, the September 11 attacks, the previously successful hedge fund Long-Term Capital Management (LTCM), FTX going bankrupt, Move-to-Earn games soar in popularity, Yuga Labs causing record-high ETH gas fees, crypto’s Black Thursday, LUNA, USTC, and BTC simultaneously plummeting.
The Black Swan Event can be predicted in the field of cryptocurrency because of the patterns observed in these events. For example, Bitcoin is considered a new Black Swan Event in the making. It is based on the blockchain technology that is causing a massive ripple in the financial industry. It is changing people’s views on money and financial privacy. The Black Swan Event is not one hundred percent predictable as it is a statistical outlier, but it is considered based on the pattern framework. A Black Swan Event in the stock market is considered a market crash that leads to a statistical standard deviation.
Conclusion
As the Black Swan Event is unpredictable before its occurrence, we cannot avoid it, but we can be prepared for it. The risk should be mitigated by diversifying the portfolio. Don’t invest in one form of cryptocurrency, try to invest in more than one so that one’s loss doesn’t affect the whole financial investment. The aptitude for continuous learning should be there because every event (especially the unexpected ones) comes with lessons that should be learned and implemented.
Always follow basic investment advice, which says “Don’t invest money you can’t afford to lose,” and keep some funds in reverse so that a single financial crisis doesn’t destroy the whole finances. In spite of careful planning and research from every angle, there is always some unpredictability that is a harsh reality that no one can account for. Hence, smart moves like keeping some liquid assets that can convert into money in a short period of time can avoid the most catastrophic consequences of the Black Swan Event.
