A black swan event is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.A black swan risk has three attributes: rarity, extreme impact, and retrospective predictability.
There are plenty of reasons to cause black swan events, including policy limitation,unforeseen economic shocks, liquidity reason,insolvent,etc. Bear market is prone to black swan events,mainly due to the liquidity crisis. Even though,black swan events have positive effects as well.Crypto assets usually have big bubbles during the bull market, black swan events are good for the price coming back to real value.After fairly sideways,assets will be dumped and the price will get lower to normal.
A crypto liquidity crisis happens when there is a lack of cash or “convertible to cash” assets. If you have crypto assets on the exchange, they must be capable of financing all of your transactions, including deposits in fiat, buying cryptos, trading, and withdrawals. However, if there aren’t enough funds or resources, it becomes a severe issue.
After that, what happens in a liquidity crisis? In the worst-case scenario, a lack of liquidity signifies impending bankruptcy. Investors should be prepared for the worst even though there are no obvious warning signals that a liquidity crisis is about to happen. Due to the inability to withdraw your assets, you risk losing the money you have on these exchanges.
Looking at crypto industry,there are three impacted black swan events recently.
- FTX crisis
On November 4,according to CoinDesk’s report on Alameda, it was found that its largest single asset and a large amount of collateral are FTX’s platform token FTT, a large number of opaque related transactions between Alameda and FTX, and large-scale investments and acquisitions in the market, have once again raised concerns in the market. After the CoinDesk article was published, SBF ,Alameda and FTX have not responded in detail.
Later, He Yi, founder of Binance, Dylan Leclair, co-founder of 21stParadigm, and many KOLs questioned Alameda and FTX. Binance stated that 20% of FTX’s shares had been sold. Subsequently, CZ suddenly stated that Binance received about $2.1 billion worth of BUSD and FTT last year for exiting a part of FTX’s equity. Binance has decided to liquidate the remaining FTT,due to the recent mess.FTT fell sharply from 50USDT to 22USDT.
SBF started head-to-head with CZ on Twitter.
On November 6, FTX’s stablecoin outflow was the largest of any exchange in the past 7 days，with net outflow of $292 million. According to Nansen, Binance has seen inflows of $337 million over the past 7 days, the largest CEX for stablecoin inflows.As market concerns over FTX’s overall liquidity intensified, a large number of users began to withdraw from FTX frantically.In the face of a sudden run, FTX withdrawal delays soon appeared.On November 8, the continuous panic finally ushered in an outbreak. FTT dived quickly after falling below the $22 mark, and fell to $15.
Whereas,on November 9, CZ and SBF simultaneously posted that Binance would acquire FTX. Stimulated by this information, BNB rose to $398, with a maximum increase of more than 20% in 1 hour; FTT rebounded from $14.5 to $21.2, with a maximum increase of 46%.However,this announcement triggered ‘Sherman Act’ which prohibits direct competitors from taking action to protect each other.Due to that FTX had a liquidity crunch in the acquisition announcement, FTT collapsed directly, dropping to the lowest $2.5.Affected by FTX, BTC fell below $17,000, and ETH fell below $1,300, and market sentiment was brought down by FTX.
- Three Arrow Capital Crisis（3AC）
3AC was one of the largest crypto-focused venture capital firms in the world.Whereas,the collapse of TerraUSD and Luna caused the entire cryptocurrency market to “collapse”. On July 1, 3AC filed for bankruptcy protection.Before Terra crashed in May, 3AC paid $559.5 million to purchase the locked Luna, which was worth about $670 after the crash.
3AC is also one of the largest holders of the institutional Bitcoin product GBTC and stETH. While,both assets have experienced severe decoupling, especially GBTC decoupling as high as 20%.3AC’s did not invest in GBTC with its own funds, the funds come from long-term uncollateralled borrowing BTC at ultra-low interest rates. In order to obtain liquidity, 3AC mortgages the GBTC to Genesis, a lending platform that also belongs to Grayscale’s parent company.
Eventually,the bankruptcy of 3AC is because of lack of liquidity.When 3AC encounters investment failure or user run, it cannot provide 600 million dollars to respond to user redemption, thus encountering a serious liquidity crisis.
- 312 Big Collapse
The first drop was caused by traders de-risking (due to the global stock market sell-off). The second drop was triggered by the liquidation of collateral by lenders.Borrower couldn’t pay, due to the first fall. Some miners shut down their rigs after the first drop, and more after the second drop.Then,the market collapsed, ETH hit the lowest of$88.
Since BitMEX only accepts BTC as collateral,when the market fluctuated by more than 30% within a day, even those traders who used low leverage began to be liquidated. Market makers , therefore, provide less liquidity, which further accelerates the decline.Derivatives are just behind as spot prices fall as collateral liquidation slumps.Given BitMEX’s central position in the crypto market, this price downside spreads to other exchanges soon.
Worse more,DeFi also failed.Maker is the largest DeFi protocol and is the foundation upon which many other DeFis are built.After the first drop, some Maker “treasuries” began to be undercollateralized. Liquidators attempt to liquidate low-collateralized “treasuries”.
As we can see from the crisis above, the main reason causing the liquidity crisis is high leverage, which uses users assets.When the market panic spreads, user run happens,therefore, comes to the liquidity crisis.
Before FTX crisis happened,the market was in the midst of a long-awaited small rebound.After many months of downturns,market panic was gradually digested, and the Fed rate hike slowed down . Many investors initially had better expectations for the November market.BTC once again stood at $21,000 , and ETH also broke through $1,600.Many investors believed that was the bottom of the market.
However,referring to the past development of the encryption industry, the market tends to rebound slightly after the bottom sideways, and then sideways again; the real bottom often appears after several black swan events.Like said in the beginning,when the bubble breaks,the price will get back to its real value. Therefore, many investors believe the real bottom gets closer after FTX crisis.
According to data released by the U.S. Department of Labor on the 4th, the U.S. unemployment rate rose to 3.7% in October this year, an increase of 0.2% from the previous month. By comparison, during the 2008 financial crisis, the average unemployment rate was 5.8%; in 2009 the average unemployment rate rose to 9.3%.The rise in the real unemployment rate tends to lag the announcement of interest rate hikes, so the U.S. recession has not really begun, and is expected to reach an economic low around mid-2023 according to the current interest rate hike policy.
Maybe the real bottom of the crypto industry will be reached by then.
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