Is a black swan coming to the crypto market?

Bitcoin hits multi-month low as stock markets crash What happened to the cryptocurrency market on Black Monday?

Between August 4 and 5, the crypto market experienced a significant decline. Bitcoin (BTC) fell below $50,000 and Ethereum (ETH) fell to $2,200. After BTC and ETH, other crypto assets in the top 10 by capitalization were also in free fall.

BTC price chart | Source: TradingViews

A significant decline caused a wave of liquidations in future contracts. In one day, the figure reached more than $1 billion, and there was a significant prevalence of long positions.

Why are cryptocurrencies crashing right now?

The collapse of the cryptocurrency market is associated with several factors. Therefore, cryptocurrencies have been closely correlated with the falling stock markets since last week. In turn, they are also affected by geopolitical tensions in the Middle East.

The Bank of Japan’s recent sudden policy changes and the US Federal Reserve’s (Fed) refusal to cut interest rates also increase uncertainty.

Additionally, community members are discussing the involvement of a major player in the market crash. On-chain analysts point to the liquidation of market maker Jump Crypto. Previously, Jump Crypto unlocked 120,000 wETH on Lido and sold most of it, accelerating Ethereum’s collapse.

Spot On Chain experts note that over the past 11 days, more than 100,000 ETH have been transferred from wallets allegedly associated with the Jump Trading company to centralized exchanges. The company began moving assets on July 25, two days after the official launch of its Ethereum ETF in the United States.

On August 4, another 17,576 ETH worth $46.78 million was withdrawn from the Jump Trading address. The total amount of assets transferred to exchanges exceeded 104,000 ETH. According to the Arkham Intelligence platform, the firm continues to hold $109.4 million worth of assets in rETH, wstETH and Ethereum.

Source: Arkham Intelligence

Additionally, the cryptocurrency market decline is being fueled by Mt. Gox’s payouts to creditors, weak ETF dynamics, and changes in the political race in the US.

What do the experts say?

Economist and head of brokerage firm Euro Pacific Capital Peter Schiff is confident that the trend will increase once the stock starts trading on the US stock exchange.

He noted that gold has fallen 45 percent from its maximum level in November 2021. It has now risen above $ 50,000, but it is worth waiting for the stock market to open.

#Bitcoin It traded below $50,000. It has fallen about 22% since the close of the U.S. stock market on Friday and is currently down 45%. #gold It’s been almost three years since its peak in November 2021. It’s now back above $50,000, but wait until the stock market opens and ETF holders can finally sell.

— Peter Schiff (@PeterSchiff) August 5, 2024

Speaking about the decline of ETH, a crypto analyst on X who goes by the moniker DeFi Mochi believes that the main reason for the sharp decline of ETH is the massive sell-off by major funds. Market players such as Paradigm and Grayscale contributed to the decline.

Has a black swan come to the cryptocurrency market?

The “black swan” theory applies to both traditional and crypto markets. Let’s take a look at how it happens.

The theory was formulated by Nassim Nicholas Taleb, an economist and author of the best-selling book “The Black Swan.” The term refers to events with significant consequences that are difficult to predict or important but overlooked.

Taleb explains that for hundreds of years people believed that all swans were white, and a black swan was seen as a sign of impossibility. However, this assumption was overturned when Europeans first visited Australia and were shocked to see black swans swimming in its lakes.

In his book, Taleb names World War I, the development of the internet and the 2008 Global Financial Crisis as black swans.

What do these unexpected events have in common? For a black swan event to occur, three defining characteristics must be present.

First, the event must be unpleasant: a black swan event is always a statistical oddity. The probability of occurrence is low, and there may have been countless times when similar conditions did not lead to such events.

In addition, a black swan event has an extreme impact: when a black swan event occurs, it significantly affects the world around it. This impact can be positive, but in many cases it is disastrous.

Yet such an event is easy to explain. Despite the unexpectedness of black swan events, people may later realize that such low-probability events can be predicted.

FTX is the major black swan of the crypto market

One of the most notable black swans of 2022 was the collapse of FTX. The crypto exchange faced legal troubles, internal instability, and an SEC investigation. The market crashed as panicked users tried to withdraw their funds from the exchange, and many FTX users were unable to get all their money back before the exchange shut down.

Terra Collapse

Due to the interconnectedness of certain cryptocurrencies, unforeseen events can cause several coins to crash simultaneously. In May 2022, a Terra user holding a significant amount of UST (now known as USTC) sold all of his coins. This led to a collapse of UST equity, and users began transferring funds to stablecoins.

Coronavirus pandemic

In March 2020, one of the first black swan events for cryptocurrencies emerged: the coronavirus pandemic, which affected all markets, including crypto. Analyst Willy Woo noted that something strange was happening in the market in March 2020, and this was reflected in investor activity. At the same time, Woo suggested that the industry was facing a black swan.

This is a chart of the on-chain “investor activity” right now. It looks solid in the long term. Very strange in the short term, normally smooth swings, not anymore, as if something hit (#COVID-19?), is fading. We are waiting for this to reverse before bottoming. Maybe soon. picture.twitter.com/uy9gSeE3Ts

— Willy Woo (@woonomic) March 10, 2020

Just one day after the World Health Organization officially recognized the pandemic, the price of Bitcoin dropped by almost 50%. Other cryptocurrencies soon followed suit, with their market cap falling by 40% in a single day. For some investors, this spelled financial ruin.

Is it possible to predict and prepare for a black swan event?

The crypto market crash and Bitcoin’s months-long decline may indicate that the crypto sector is unprepared for the consequences of recent weeks. However, a black swan means a longer decline in the crypto market, so it seems premature to talk about its occurrence.

It’s important to remember that black swan events are an inevitable part of life in the crypto market. They can be disastrous, but they can also represent opportunities. The important thing is to be prepared for them and have a strategy in place should they occur.

The most important thing to remember about black swans is that they are unpredictable. It’s impossible to know when or where they will occur or what the exact consequences will be. But by being aware of them and understanding how they work, investors can be better prepared for them and use them to their advantage.