Hitesh Malviya

@hiteshmalviya

Is Bitcoin a Black Swan Event?

December 17th 2018

The cryptocurrency market is one of the fastest moving industries in the world right now. While the market and its proponents are generating a large amount of space for even higher investment activity, there is always a little bit of apprehension when it comes to the market. The reason for the inherent apprehension is the fact that there is always a sword hanging over the cryptocurrency market’s head. In terms of regulation.

But with that being the case, in the past ten years of existence, the cryptocurrency market has amassed quite a lot of positive appreciation and attention as well. What started off as a single coin market now has over 2,000 active coins.

With the cryptocurrency market growing at the speed that it is, there is a lot of talk about the future of the market as a whole. There is a lot of speculation and there is a whole load more regulation on the way for the market. Even so, there is a strong feeling amongst the community and the spectators that we are in the midst of the world’s next black swan event.

The Black Swan Theory

The black swan theory is a theory that was developed by former trader Nassim Nicholas Taleb. He developed this theory to explain the disproportionate effect one event can have on history and civilisation. In other words, a black swan event is an event that cannot be predicted. However, under the black swan theory, after a black swan event takes place it becomes apparent, in hindsight, that the event was ‘bound to happen’ or inevitable.

There are three main characteristics of an event on which the principles of the black swan theory are applicable:

  1. The event is a surprise (to the observer).
  2. The event has a major effect.
  3. After the first recorded instance of the event, it is rationalized by hindsight, as if it could have been expected.

The reason that the black swan theory is called the ‘black swan theory’ because back in the day it was taken for granted that all swans were white and finding a black one is highly improbable. Hence the name was adopted for a theory that helps people understand unpredictable events.

Black Swan Events

In world history, there have been a handful of black swan events. Some famous for the radical change they brought into the way people work and others are known for their devastating after effects. All once their impact wore out, have been events that could’ve easily been predicted or as it is said under the black swan theory, it was “bound to happen”.

Here are the black swan events that have happened in history and are currently underway;

  1. Dot Com Crash
  2. 9/11 Attacks
  3. Great Recession
  4. Brexit

Contrary to popular belief, the expansion of the Internet was also a black swan event. When it was initially introduced to the world, the Internet was but a protocol for devices to communicate with each other. With that being said, there was a drastic increase in the number of people using the Internet and that led to a huge increase in the number of Internet-based companies and services.

The fateful period, which was later called the Dot Com Bubble, helped companies flourish in the span of three years 1997–2000. Following that, the bubble burst and led to a huge dot-com crash which wiped out more than half of the internet-based companies overnight. In fact, the crash was so bad that NASDAQ wiped out more than 78% of its own Composite.

The other black swan event that had huge backlash for the entire global population was the 2008 Recession. In which banking services lacked a useful regulation and indulged in many unfair trade practices. Because of which, the banking system engineered a market crash whose after effects were felt worldwide. The most affected from the 2008 Recession were the developed countries, the other developing countries continued to grow at a substantial rate regardless.

While this took the entire world by surprise, in hindsight it became clear that the crash was bound to happen, given the banking practices of many of the top brass. With that being said, though there were signs, the market crash of 2008 was not predicted and took the entire world by surprise. Making it one of the biggest black swan events in history.

Bitcoin: the New Black Swan?

Speaking of the Recession of 2008, it is almost impossible to ignore the advent of the Bitcoin. Bitcoin was created and introduced to the world in 2008 with a whitepaper. Following that, in 2009 the first block or the genesis block was mined. And though Bitcoin has had its set of ups and downs, it has literally been no looking back ever since.

In its initial year, Bitcoin was tainted with having deep connections to the darknet’s infamous market called the Silk Road. A fact that was taken advantage of by every news outlet at the time. But with time, Bitcoin established a reputation of its own and has more than stood by it.

In essence, Bitcoin is a global currency that can be traded, bought and sold with no trust required. In other words, there is no centralized server or middleman processing the transactions, it is, rather, purely technical and peer-to-peer with very little room to manipulate. Bitcoin has no sense or structure of ‘governance’. It is simply peer-to-peer and anybody can buy into it.

The introduction of Bitcoin into the world had very curious timing. It came at a time when there was utter disgust among the people towards banking and the financial world because of the recent crash. And a lot of people and businesses alike had lost a lot of money in the process. With this as the setting, Satoshi Nakamoto released a currency that was not in the control of the government, was completely trustless and accessible globally.

Which is why many people in the cryptocurrency community and financial structure believe that Bitcoin is the next black swan. But before we take it as a given, let us see if Bitcoin fits into the criteria of black swan event.

The criteria for Bitcoin being a black swan event are the following;

  • The event is a surprise: The release of Bitcoin in the global market, to the observer, was a complete surprise. Because until Bitcoin came about, nobody thought that such a currency could exist, let alone flourish. So, yes, it was a surprise.
  • The event has a major effect: Bitcoin, in ten years has become the largest and first cryptocurrency in the market. The cryptocurrency has also amassed quite a following and a huge tight-knit community worldwide. Bitcoin, alone, has been the subject of many a debate in parliaments and governments across the world. With that being said, Bitcoin has also spawned a market with over 2000 individual cryptocurrencies and also has a side startup industry based on the blockchain. So, yes, it did and does have a major effect.
  • After the first recorded instance of the event, it is rationalized by hindsight, as if it could have been expected: If we were to take under consideration the timing of Bitcoin’s introduction into the world and how it has become almost a threat to the financial structures of the world, it can be rationalised by hindsight.
  • Because people were extremely disgusted by the financial structure failing them and leading the world into a financial crisis, Bitcoin (a government free, trustless currency) managed to do so well. So with that in mind, it seems as though the invention of a currency that is free of the government and required no middleman was bound to happen.

In conclusion, given that Bitcoin satisfies all three conditions of the black swan theory, Bitcoin is the new black swan event. It’s a Good or a Bad Black swan, Time will tell.

References:

https://en.wikipedia.org/wiki/Black_swan_theory

https://www.investopedia.com/news/black-swan-risk-cryptocurrency-markets/

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