The concept of black swan events was first popularised by the economist Nassim Nicholas Taleb in his book, The Black Swan: The Impact Of The Highly Improbable (Penguin, 2008).
Taleb describes black swan events as:
- Being so rare that even the possibility that one might occur is unknown;
- Having a catastrophic impact when one does occur; and
- Are explained in hindsight as if they were actually predictable.
A black swan event is bound to happen the longer that you stay engaged in the market and your success is determined based upon if you can survive that black swan event.
Past examples of Black Swan events
Some examples of arguably black swan events that have negatively affected the crypto market include:
- COVID-19 market crash of March 2020
- Terra Luna collapse of May 2022
- FTX exchange bankruptcy of November 2022
Some events are more predictable than others, for example, employees or insiders could have seen the Terra Luna or FTX events coming. Natural disasters, terrorist attacks, wars, or pandemics like the COVID-19 crash are far less so.
Tips to minimising the impact of Black Swan events on your portfolio:
Don’t put all your eggs in one basket
It’s the old cliche but it’s true, diversification is key. Spread out your portfolio risk across different assets and don’t chase only the highest-risk assets.
Also, spread investments across multiple exchanges as exchanges seem safe on the surface until all of a sudden they are not. Mt. Gox and FTX are two examples of large exchanges that have become insolvent. Ideally, the best way to store your digital assets is in your own wallet, even better multiple wallets. The saying goes “Not your keys, not your crypto”.
Avoid debt and leverage
The crypto market is the most volatile asset market that exists. Even using low leverage, it may seem like you have a safe liquidation price, though what happens if a black swan event occurs? Furthermore, leveraging or taking out loans for trades or investments adds stress and can limit one’s ability to make swift decisions when a black swan event occurs.
Keep some cash on hand
It’s important to be able to cover short-term daily expenses and continue your normal daily routine. Also, those with the most financial resources at hand are the best positioned to scoop up assets at bargain prices in the event of a black swan.
