A black swan event is the possibility of the occurrence of an unpredictable event that cannot be explained using standard economic models. Economist and author Nassim Nicholas Taleb coined the term to explain events that are extremely unpredictable and rare.
Understanding the term
According to Taleb, a black swan risk has three attributes characterized by its unpredictability, severe negative consequences, and the conviction of its predictability in hindsight. Manifestations of a black swan event are unlimited, including natural disasters, wars, financial crises, and outbreaks of viruses.
In the past, people in the West believed all swans were white because only white swans were accounted for. Dutch explorer Willem de Vlamingh discovered black swans in Australia in 1697, which turned out to be an unexpected scientific breakthrough.
Investors usually view a black swan event as one that negatively affects the stock market. Such events have a negative effect on asset prices.
In the case of crypto markets, it is possible for external events, such as crackdowns on cryptocurrency exchanges caused by certain factors, to force a black swan effect. For instance, crypto enthusiasts see the fall of UST as a black swan event that caused Bitcoin’s price to drop by $10,000 in a few hours.
In Taleb’s view, the best way to mitigate a black swan event is not to predict its occurrence, but rather to build resilient systems to reduce its likelihood. Some of the precautionary measures in investing include portfolio diversification and hedging.
A black swan event is an important phenomenon in the financial markets, which can have potentially negative effects on the stock and crypto markets. The event is often as rare as the chances of finding a black swan in nature. According to finance professor Nassim Nicholas Taleb, such interactions may result in nonlinear and unpredictable outcomes under certain circumstances.