Why do black swans always appear? An article to understand the biggest killer in the financial market.

Have you heard of “black swan”? It's not a real swan, it's the most terrifying term in the financial world.

The Theory Starting from a Bird

Before the 17th century, Europeans firmly believed that there were only white swans on Earth. It wasn't until 1697 that Dutch explorer Willem de Vlamingh discovered black swans in Australia, which shattered centuries of perception. This event inspired NYU professor Nassim Nicholas Taleb to write the book “The Black Swan,” used to describe those events that seem impossible but, once they occur, can destroy everything.

Black swan events have three characteristics: they are difficult to predict, they cause severe consequences, and they seem obvious in hindsight.

Why the Market is Always Targeted by Black Swans

Taleb uses the turkey to explain this problem: the turkey is fed every day and becomes more and more convinced that it will be fed tomorrow, until Thanksgiving Day—its world shatters.

This is humanity's greatest weakness: We use the past to predict the future, yet we overlook those things that have never happened but could happen. The stock market and the crypto market are no exception to this trap.

Major Crashes in History

2001 Internet Bubble

In the 1990s, technology stocks soared, and everyone believed “this time is different.” As a result, the Nasdaq crashed by 78.4% in 2002, and the unemployment rate in the tech industry skyrocketed to 17.8%. It was only after the fact that people understood: high valuations + excessive speculation = inevitable collapse.

2008 Subprime Mortgage Crisis

Even Federal Reserve Chairman Greenspan said, “I didn't expect it to be like this.” As a result, the unemployment rate doubled to 10%, 3.8 million houses were foreclosed, and investment bank Lehman Brothers went bankrupt directly. Looking back now, the problem is very clear: banks issued excessive loans to bad borrowers and then packaged and sold these “toxic debts” globally.

2010 Flash Crash

A British trader created fake orders by manipulating algorithms, causing the stock market to evaporate nearly $1 trillion in one day. Now, exchanges in various countries have installed “circuit breaker mechanisms” to prevent a repeat.

2022 Cryptocurrency Market Chain Explosion

• The Terra ecosystem collapsed, with the cryptocurrency market evaporating hundreds of billions in just a few days, and BTC plummeting from 39,000 to 29,000.
• Celsius Bank collapsed, BTC has dropped to 19000
• FTX crashed, once the second largest exchange in the world, collapsed overnight, freezing billions of investors' funds, with BTC dropping to a low of 15000.

This is the black swan of the crypto market: high concentration, lack of regulation, and information opacity, which will inevitably lead to a chain collapse once something goes wrong.

What can you do

Since the black swan is bound to arrive, rather than predicting when it will appear, it is better to be prepared.

1. Diversify your investments: Don't put all your money in one asset or one exchange.
2. Diversified Allocation: A bit of stocks, gold, real estate, and cryptocurrency.
3. Leave Cash: Black swan events often create opportunities at extremely low prices; having cash allows for buying the dip.
4. Psychological Preparation: Accept that “the worst will definitely happen”; this way, you won't panic when something goes wrong.

The Last Truth: Whatever can happen will eventually happen. Instead of fearing the black swan, it's better to learn to dance with it.