If you have spent any time at all looking into cryptocurrency assets and investments, you may already know of the ‘black swan’ phenomenon. This is a term that is used to describe a variety of different events (in and out of trading), and we will discuss its meaning here very shortly. However, it’s worth addressing the elephant in the room – crypto is wild, unpredictable, and often pretty risky.
Thankfully, there are plenty of ways for everyday traders to manage their crypto interests on the go. Using crypto broker Bitfinex or otherwise, for example, may help them weather the violent ups and downs of the market.
But what is cryptocurrency’s problem when it comes to volatility? And where does this tie in with black swan events?
What is a Black Swan?
A black swan event is one that is sudden, unpredictable and catastrophic – but one that becomes manageable after a short time. It is often an unprecedented event, meaning that there may not be any clear historical pattern to its emergence. Ultimately, it’s a shock that sends ripples across an industry or community and can often have long-lasting effects.
A great example of a black swan event in recent times, of course, is arguably the COVID-19 pandemic. The rise of the novel coronavirus was unprecedented and led to mass hospitalizations and deaths worldwide. However, two years on, there are management policies and standards in place.
We can transfer this black swan theory to the crypto markets – Bitcoin (BTC) in particular. The initial rise of BTC was in itself fairly unprecedented. So too, therefore, was its first crash. BTC has, over the years, peaked and dipped hugely – always to the fascination of the media and that of newbie traders.
Black swan events in trading can be devastating. Financial crashes over the years, those which have transformed the landscape completely, can be clearly labeled as black swans. However, while it’s tempting to call every major dip in the crypto scene a black swan, that is perhaps a little too dramatic. That is, of course, due to the fact that cryptocurrencies are notoriously volatile, especially when compared to traditional assets.
But why are cryptocurrencies so volatile in the first instance? Can we explain this away?
Why cryptocurrencies are volatile?
There is a ‘perfect storm’ in play when it comes to cryptocurrency volatility. It is partly due to the fact that cryptocurrencies are entirely digital and are untethered to physical money or banking. In addition, it is a result of crypto appealing to ‘part time’ traders. This means that markets may dip thanks to traders and investors dipping in and out of the markets themselves.
There’s also the fact that, despite having been on the rise for many years now, crypto is still very much speculative from an asset perspective. A glance at global laws on crypto will tell you that many territories still don’t know how to treat the phenomenon. Is it legal tender? Can it be taxed? No one has a full consensus.
However, the mainstream is very much catching up to the idea of crypto. With lending rules changing the world over, and with interest rates spiking in some territories thanks to the rebound effect from COVID-19, there’s a growing interest in portfolio diversification. That no longer means, necessarily, traditional assets. Those who have been trading for years, even decades, in oil, gold and more will be drifting over to the digital standards as a new way to make money.
All these elements add up to a market or markets that are often likely to peak high and drop extremely low. At the time of writing, BTC, in particular, is seeing a drop that some media outlets are describing as catastrophic.
While it may seem catastrophic to speculative traders and newbie investors, this kind of volatility is not indicative of a black swan event. It is, believe it or not, part and parcel of crypto trading, for the most part!
Will cryptocurrency always be volatile?
There is, of course, nothing to say that any kind of black swan event will never happen again. What’s more, until there is a general consensus on how to adopt, handle and legislate for crypto, the markets will always be volatile.
Therefore, now really is the time to start researching the markets – it may not be long before BTC and its contemporaries start balancing out – could we be close to a plateau and not even realize it?