Black Swans and Why They Matter

Hi, fellow readers! In this difficult period for the crypto universe and entire Earth, we want to talk about the underlying reasons for such problems. If you’re familiar with the black swan theory by Nassim Taleb, feel free to skip the first two sections. Otherwise, educate yourself!

This guide is prepared by Superorder and serves for educational purposes only. We’re not prophets, just a team that wants to help investors.

Photo by Paweł Czerwiński on Unsplash

The Black Swan Theory

Historically, a black swan is a term from the expression of Juvenal, a Roman poet of the 2nd century. At his times, people thought that black swans don’t exist, so the phrase itself was used for various impossible ideas. Still, Willem de Vlamingh discovered black swans in Australia in the 16th century, changing the expression’s meaning. After the expedition, the term was used to show that any idea may be disproven someday.

The modern understanding of black swans was proposed by Nassim Nicholas Taleb in the early 2000s. According to his theory, a black swan is an unpredictable event with major (mostly, negative) consequences. Such things come suddenly and feature severe impact. More precisely, Taleb specifies three key characteristics of black swan events:

1. They are outliers. These occasions are beyond our expectations. It’s impossible to forecast them based on the information available before the event itself.
2. They have an extreme effect. Usually, black swans cause significant damage. However, if approached strategically, they can generate great benefits.
3. They lead to hindsight bias. Experts tend to rationalize these events afterward and say that the core data was available but missed. That’s a mistake.

Despite the third fact, we still can learn from black swan occasions. By processing the generated information, experts can find rational explanations and use them to predict the next major events of the same type. Just like de Vlamingh revealed black swans for Europeans, analysts can make specific events understandable.

Some Examples of Black Swans

To grasp the idea, let’s look at some past black swan events. For instance, it was impossible to predict 9/11 — a massive terrorist attack that led to thousands of casualties. Political disruptions such as Brexit are also black swans, one way or another. Talking about positive swans, there was an unexpected and global success of the Harry Potter series that turned Joan Rowling into a billionaire.

Nonetheless, the brightest illustration of Taleb’s theory emerged a year after he wrote the book describing this concept. We talk about the financial crisis of 2008. The most severe economic crisis since the Great Depression, it started with issues in the American mortgage/housing market and ended wiping out trillions of dollars from the global economies, destroying financial companies, and ruining lives.

COVID-19 as the Most Recent Event

What we see now is another clear example of a black swan. Literally nobody could predict such a big pandemic situation. Currently (March 14), the virus known as SARS-CoV-2 infected more than 150,000 people around the world with the disease COVID-19. It killed over 5,700 patients. And while China is reducing the number of new cases, other regions are only entering the active phase.

Source: https://coronavirus.jhu.edu/map.html

Earlier, we wrote that gold and Bitcoin aka digital gold are great hedging assets for traditional investors. That’s true but only for the first stage of any financial black swan. When COVID-19 only emerged, BTC moved up to $10,000 with +30% in two months. However, both assets failed to become safe havens as the virus continued spreading. People and institutions return to fiat because BTC is a too risky investment now.

Following the drops of all major markets like stocks, financial indexes, and oil, cryptocurrencies went red this week. Bitcoin set a new low at $3,700, altcoins dropped greatly, too. Today, the prices are back to more moderate lows — around $5,500. This situation proves the words of Andreas Antonopoulos who thinks that the upcoming financial crisis may harm the cryptocurrency industry, too.

Coping with Improbable

Well, what’s the first conclusion from this information? It may sound hopeless but we can’t predict black swan events at all. While hindsight bias tells people that they can forecast unexpected events, don’t give in to this mindset. The nature of black swans makes them sudden and unpredictable without exclusion.

Nevertheless, there are a few ways to prepare for such issues, mitigate risks, and even benefit from them:

• Accept black swans. They will occur and you will have to deal with the consequences. By accepting them, you remove the surprise factor and can meet the unexpected things with a cool head.
• Catch opportunities. Returning to the financial markets, don’t forget to be greedy when others are fearful. Any fall is a nice chance for long-term investors who can buy lows and then multiply profits.
• Diversify assets. It’s another golden rule of investments but you should know it: don’t keep all your eggs in one basket. When a black swan hits crypto, you want to have some money in stocks, and vice versa. Just an example, you know.

At the end of the day, remember that black swans arrive earlier or later. And it’s a good idea to be ready for them. Keep calm, wash hands, and HODL!