What is Black Swan? Summary of Black Swans in financial history
What is Black Swan?
A Black Swan is an unpredictable event that goes beyond the usual principles of a situation and brings serious consequences. In finance, Black Swan is often used to refer to a dark period of the entire industry when a continuous downtrend takes over the market.
This term became popular thanks to Nassim Nicholas Taleb, a finance professor, writer and trader on Wall Street. Nassim Taleb wrote about the concept of the Black Swan in a 2007 book published before the 2008 financial crisis. He argued that since Black Swan events are unpredictable due to their rarity and have catastrophic consequences, it is important for people to assume that a Black Swan is always possible and to plan accordingly.
Some Black Swans in the Financial Market
As mentioned above, a Black Swan is an event that is unpredictable and has catastrophic consequences for the financial markets. If we project it over a period of time, we can see that a Black Swan is the result of real-life events that create uncertainty and cause financial markets to shake. Or more simply, it is the belief that is pushed to the level of illusion about the growth of a new trend in the financial or technological market.
· Dotcom Bubble
The 90s of the last century are considered the golden age of technology when programmers of developed capitalist countries continuously introduced new tools and technologies. The most typical are Google, Amazon and Apple, these can be considered the 3 great monuments of technology, each company brings to the world completely new experiences in searching for information, shopping or simply a new type of computer.
Although bringing to humanity a series of new technologies, for the financial market, these are also extremely lucrative baits. The launch of a series of new technologies led to a wave of Dotcom companies being born and listed on the stock exchange. Investors' strong belief in new technology caused these stocks to be inflated in price while the business operations of these companies were weak or completely non-existent. By the beginning of 2000, when the gap between real value and value on the stock exchange was getting bigger, a series of company collapses followed one another, creating a Domino effect and with that, billions of dollars of investors were swept away.
· The 2008 financial crisis
When mentioning Black Swans, we cannot ignore Lehman Brothers and the 2008 financial crisis. The root of this problem originated from the US credit market when the chain reaction started from the decline of the real estate market.
At this time, millions of subprime loans were existing in many banks in the form of installment loans and were secured by the assets themselves. Just from the decline in house prices, the liquidity of loans was thinning over time, a series of loan contracts were continuously liquidated, leading to financial entities continuously falling into bankruptcy. And among them, Lehman Brothers was the giant that held the most of these debts.
When Lehman Brothers went bankrupt, a domino effect occurred due to the debtor-creditor relationship of the entities, paralyzing the entire financial market. Even the then Fed Chairman Tim Geither and Treasury Secretary Hank Paulson asked for help from Larry Fink (owner of BlackRock) to rescue the US financial industry.
· COVID-19 Pandemic 2020
When it comes to the COVID-19 pandemic, we certainly cannot forget a dark period of humanity when the smallest contact such as holding hands can bring about unpredictable consequences. And the financial market is just as sensitive, right from the beginning of 2020, the financial market had a not-so-bright starting point due to the consequences of the previous crisis. By February 2020, the market continued to deteriorate due to the outbreak and spread of the COVID-19 epidemic in major economies.
The consequence of this was that a series of non-essential industries were stagnant, the supply chain was broken due to the blockade orders, putting great pressure on production and trade activities. This downward trend had such a severe impact that Wall Street had to stop trading 3 times, something that rarely happened before.
Black Swans in the Cryptocurrency Market
· March 2020
Continuing with the above events, in March 2020, when former President Donald Trump was still optimistic about the ability to control and the scale of the epidemic, at this time in the Asian market, especially China, the daily report of the number of cases was more than 1,000 infections. The stock market, specifically the stocks of large companies, continuously plummeted. At the end of the first quarter of 2020, the Dow Jones index decreased by 24.81%, the S&P 50 index decreased by 21.09% and the Nasdaq decreased by more than 14.5%.
At this time, the cryptocurrency market also had strong declines, most specifically Bitcoin with a decrease of nearly 5,000 prices, causing the market to be bloody in just one day.
· May 2021
May 19, 2021 can be considered one of the bloodiest Wednesdays in the market when Bitcoin fell from the support level of $40,000 to more than $34,000 in just 24 hours. In addition, USDT, the most liquid stablecoin in the market, also lost its peg to $0.84. As a result, a series of futures orders were liquidated equivalent to $4.3 billion in just 1 hour (18:00 - 19:00 Vietnam time) and $8.94 billion in 24 hours.
The reason for this is the decree banning all companies, organizations and financial institutions from providing services related to cryptocurrencies from 3 Chinese financial associations. In addition, this information was released just 7 days after Tesla announced that it would stop accepting payments in cryptocurrencies. In addition, Binance’s FUD news and Vitalik Buterin’s memecoin dumping created a negative market sentiment, which pushed BTC prices into free fall.
At that time, almost every corner of the cryptocurrency market was negatively affected, most notably the two price checking sites CoinGecko and CoinMarketCap, which were constantly down due to users constantly checking prices. Exchanges like Binance also had to temporarily suspend withdrawals due to network congestion.
· September 2021
On September 7, 2021, right after Bitcoin was recognized as legal currency in El Salvador, it was still thought that this would be a memorable milestone for this cryptocurrency, but this is probably one of the most unforgettable events since Bitcoin was traded. Specifically, after recording a slight adjustment from 52,300 USD to 50,400 USD in the afternoon Vietnam time, just a few hours later, this coin suddenly dropped more than 7,000 USD to 43,000 USD (equivalent to a decrease of 19.1%). According to statistics at that time, nearly 1.2 billion USD worth of trading orders were liquidated during this drop, mainly concentrated on major exchanges.
According to observations, at that time, there was no major event or factor that could affect the price of Bitcoin, so the only reason could only come from the continuous liquidation of small to medium-sized futures and margin orders, creating a "snowball" effect. Before that time, the market had a slight increase, making investors optimistic, thereby explaining a large number of long positions with large leverage. For this reason, when the market adjusted, a series of investors had their orders liquidated, pushing the price down.
· December 2021
At noon on December 4, 2021, Vietnam time, Bitcoin continued to plummet from the support level of 50,000 USD to 42,000 USD, equivalent to 22% and 8,000 prices. As a result, more than 1.3 billion USD of derivative orders were liquidated, more than 50% of which were Bitcoin and most of them were is a long order.
The reason for this may largely come from the lack of momentum for growth due to news. Specifically, since the ETFs were listed on the US stock exchange in October and the event of Bitcoin successfully implementing the Taproot upgrade, Bitcoin has completely run out of momentum for growth. In addition, Bitcoin's previous upward momentum largely came from the US's 30-year peak inflation rate, making crypto a good alternative asset to the depreciating USD.
Next, also because the new strain of COVID-19 called Omicron has caused negative public sentiment, thereby placing asset shelters such as gold above cryptocurrencies, specifically Bitcoin. According to information released by the media at that time, Omicron is more virulent and infectious than other strains, threatening all previous efforts to prevent the epidemic.
On the part of regulators, in order to deal with new variants, officials of the US Federal Reserve (FED) have proposed raising interest rates earlier than the plan to maintain this index that Jerome Powell, Chairman of the FED, previously proposed. This is one of the moves to avoid the old mistake that this unit made in 2020 in the heart of the epidemic.
· March 2023
On the morning of March 11, 2023, Circle, the issuer of USDC, the world's second largest stablecoin after USDT, spoke out to acknowledge the impact of the collapse of Silicon Valley Bank. Specifically, this unit said that Circle kept about 25% of the cash collateral for the USDC stablecoin at this bank.
"Silicon Valley Bank is one of 6 banking partners used by Circle to manage about 25% of the cash used as reserves for USDC. While we wait to see how the FDIC takeover will impact depositors, Circle and USDC operations continue as normal.” Specifically, USDC is backed by $43.5 billion in assets held by Circle and $11.1 billion in cash. This means that the amount of money that Circle is "frozen" at Silicon Valley Bank is 1.7 billion USD. However, all efforts to reassure investors have been ineffective as a series of traders fled this stablecoin. According to data from Nansen, more than 2.3 billion USD in requests to convert assets from USDC to cash have been processed by Circle in 24 hours.
Not only Circle is the most affected unit, but other units from Defi to Cefi are also victims of this incident. The most typical one is 3pool, the most abundant stablecoin liquidity pool in the DeFi industry, established by Curve. The reason comes from the fact that this pool consists of 3 assets: USDT, USDC and DAI, 2 of which are USDC and USDT are the most affected because investors massively swap from USDC and USDT, causing the ratio of USDT to only 3% in the pool, the swap rate to only 0.97 USD and pushing the trading volume 3pool's intraday trading volume increased to $1.5 billion. In addition, not only USDT was a victim but DAI was also one of the affected assets, in 24 hours, the amount of DAI issued from USDC collateral increased to more than $700 million.
Binance was also the unit most affected by this when the crypto industry giant held more than $5 billion worth of USDC. Following was Crypto.com with more than $700 million and many other projects such as: Arbitrum, Polygon, Aave, Optimism, dYdX and Compound, Uniswap, Curve, MakerDAO. Not only that, stableco
· The collapse of LUNA - UST
When mentioning LUNA-UST, readers must still be terrified by its impact on the cryptocurrency market. In less than a week from May 8, 2022 to May 14, 2022, Do Kwon's billion-dollar business collapsed, leaving many consequences and sentences for ambitious founders. Its impact did not stop at the cryptocurrency market but also spread to the traditional market.
On May 5, 2022, Luna Foundation Guard (LFG) bought an additional $1.5 billion in Bitcoin to raise the guarantee for UST to nearly $3.5 billion. Just 3 days later, thanks to the secret agreement between Terra Form Labs and Jump Crypto, this unit spent a large amount of money to subsidize UST, which had already depeg for the first time. Two days later, UST continued to depeg for the second time and LFG (Luna Foundation Guard) had to sell 1.2 billion USD BTC (previously sold 750 million USD BTC) to save the price.
On the morning of May 11, 2022, UST depeg for the third time, LUNA (the token that guarantees UST) dropped to 13 USD. On the evening of the same day, UST depeg for the fourth time and LUNA split 19 times to 0.68 USD. One day later, Terraform Labs continued to announce a plan to burn 1.3 billion UST to save the price of this stablecoin. By May 13, 2022, LUNA's supply increased from 400 million to 6.9 trillion and UST depeg for the fifth time. Two days later, the price of LUNA and UST dropped by 99%, the 60 billion USD ecosystem completely collapsed, ending a billion USD empire that was once the pride of the Korean crypto community.
· The collapse of FTX
Under the leadership of Sam Bankman-Fried (SBF), FTX has achieved certain successes and expanded its reach into all fields from sports to Esports and entertainment. Names that have had relationships with SBF and FTX include: esports team Team SoloMid (TSM), North American League of Legends Championship Series (LCS), F1 racing team Mercedes-AMG Petronas, Super Bowl, NBA basketball team Miami Heat. Not only that, SBF also used its cleverness in communication to bypass government officials and even spend a lot of money on US elections. In the media, SBF's image is also filled with beautiful words describing him as a billionaire of a new generation.
However, by May 2022, the market was shaken by more than 60 billion USD because LUNA-UST indirectly triggered the Domino effect. At this time, in order to save itself, SBF spent a lot of money to protect the FTX empire as well as Alameda Research - FTX's "sister" crypto investment fund. However, in June 2022, Alameda Research made a deal that SBF later regretted. Specifically, this fund lent Voyager 500 million USD, accidentally causing Alameda Research to fall into a spiral of debt and leverage, thereby activating the chain. In the midst of the market turmoil, FTX's customers wanted to get back the money they had lent, and of course FTX and Alameda Research had no money to repay because they had lent it.
Then, in order to save Alameda Research, FTX used customers' money to guarantee Alameda Research by siphoning off user credit and printing more FTT to use as collateral for new loans. To put it more simply, it is using virtual money to exchange for real money. As a result, due to not anticipating the changes in the market, FTX caused a deficit of up to nearly 10 billion USD and the amount after the incident was settled was much larger than the above 10 billion USD. And the perpetrators received appropriate punishments of up to 100 years in prison for their violations.
· The Middle East Fire
The Middle East has long been a hotbed of conflict, especially between Iran and Israel. In the early morning of July 31, 2024, the leader of Hamas was assassinated in the capital of Iran. This is considered the trigger for future sanctions by Iran's Supreme Leader Ayatollah Ali Khamenei against Israel. In response, Israeli Prime Minister Netanyahu said that he would retaliate against any action against the country.
The financial market, especially cryptocurrencies, reacted strongly to this news. Specifically, Bitcoin fell nearly 4% from $66,500 to $63,600 in just a few hours.
And following the negative reaction of the king coin, major altcoins such as ETH, SOL, AVAX or ADA all fell simultaneously. This resulted in more than $185 million in leveraged positions being liquidated, mostly long positions (95%).
· Economic recession fears
Just 48 hours after news of the Middle East's hot spot, financial markets including US stocks and cryptocurrencies continued to witness a wave of sell-offs due to the sharp increase in unemployment. Specifically, on the evening of August 2, data on the unemployment rate of the world's largest economy was released at 4.3%, 0.2% higher than expected.
The high unemployment rate not only reflects a decline in purchasing power but also shows a poor economy. For that reason, it has created concerns among investors about an economic recession. In the trading session on August 2, 2024, major US investment indices such as the S&P 500, Nasdaq and Dow Jones all showed their worst performance in recent months. The total capitalization of the US stock market has evaporated more than 1.2 trillion USD, while in Japan, this country has recorded the worst trading day since 1987.
Faced with this information, Bitcoin, after being affected by the information of the Middle East conflict, continued to slowly decrease from 65,000 USD to 60,500 USD, the lowest level since mid-July. This is equivalent to a decrease of 13.5% in just 1 week, Ethereum also plummeted more than 7% in value, other altcoins also decreased from 3% -15%.
· Rumors of Jump Fund selling assets
On the evening of August 4, 2024, in the panic of the market, the prices of cryptocurrencies plummeted sharply. Bitcoin lost more than 12.8% of its value (from $61,000 to $52,300), Ethereum fell more than 22% to $2,100, the lowest price since the beginning of the year. The reason for this is the rumors surrounding the asset movements of the Jump Trading fund. As of noon on August 5, 2024, this fund has unstaken $315 million ETH and transferred them to CEX exchanges.
Not stopping there, Arthur Hayes, co-founder of BitMEX, posted on X that some of his relationships in the market said that there are currently some pretty big names that are in a pretty tense situation and are dumping all crypto. The community seems to have guessed that the name is most likely Jump Trading.
By noon on August 5, 2024, the entire market witnessed Bitcoin's dump to $49,000, shortly after recovering to around $53,000.
After BTC, ETH also witnessed a sharp drop to $2,100 before recovering to around $2,300.
Not only that, 90% of long orders in the market were also liquidated, equivalent to more than $1 billion in 24 hours. On-chain orders, the liquidation level on decentralized protocols also reached $350 million, the highest level since the beginning of this year. The reason for this is said to be because Ethereum's decline caused ETH collateral assets to bear a large liquidation burden ($216 million).
Conclusion
Above is information about Black Swan and specific examples in traditional financial markets and cryptocurrencies. Through the article, hopefully oin68 has brought readers the most general perspective on this concept. Although Black Swan is a phenomenon that no one wants to happen, it is something that must happen so that the financial market can calm down and check its greed.
