What is Black Swan Event?

A black swan is often defined as an unexpected occurrence that has a significant influence on a previously predicted event. It rarely happens, nevertheless, it has consequences.

Unfortunately, it’s impossible to predict a black swan event beforehand, even though it can cause enormous damage to the economy. That’s because it has a negative impact on investments and the market in general.

The phrase Black Swan Event could have come from a Latin phrase said by Juvenal, the Roman poet, in the 2nd century. The Latin phrase he said means “an unusual bird in the lands that looks a lot like a black swan”. For a long time, it was thought that black swans do not exist. Later on, the name of these birds was used when talking about something that comes as a surprise.

The term was first used by a writer and finance professor, as well as the former Wall Street trader, Nassim Nicholas Taleb. To be precise, the writer talked about the term in his book. The book was written in 2007. He emphasized the importance of preparing for anything unpredictable to happen and planning ahead.

The probability of its occurrence is unknown. However, when it happens it has a big negative impact. Those who observe the event and the aftermath, are known to be speculating as to what could have prevented it and how it could have been predicted. Moreover, the event can be explained only in retrospect.

When a black swan event happens in the field of finances and cryptocurrency it results in huge misery and destruction.

As an example, consider the 2001 dotcom bubble. This occurred during a period of rapid economic expansion in the United States, as well as a surge in private wealth before everything spectacularly crashed. At the time, investment funds were pouring money into technology firms with exorbitant valuations and no market traction.

Then these firms went bankrupt, and the negative risk was transferred to the investors.

A similar situation happened in 2008, amid a financial crisis when the housing market in the United States collapsed. The repercussions were massive and far-reaching. People with poor or no credit were approved for mortgages on homes that were much beyond their financial limits.

At the same time as payment deadlines passed and mortgages began to default in droves, the lending powerhouses began to fail.

The U.S. government then approved the TARP (Troubled Asset Relief Program). To be more specific, approximately $1 trillion was invested to assist large banks and reestablish liquidity in the economy. Furthermore, the regulations were modified in the hopes that this black swan incident would not occur again.

The most recent example is the COVID-19, which hit the world without warning. There was no one prepared or equipped to deal with the epidemic. Therefore, it had a significant influence on stock market crashes, unemployment rates, business failures, and so on.

To be fair, COVID-19 fulfilles all of the criteria for a black swan occurrence.