Study: The impact of Bitcoin halving on price

In the world of cryptocurrency, we always connect the causal relationship between various events or use this causal relationship thinking to explain various phenomena. Especially for the price trend of Bitcoin, halving seems to have become a key signal leading to the rise of Bitcoin prices.

Citing research from Nico Cordeiro and Ava Masucci of Seattle startup Strix Leviathan, the article analyzes 32 halvings of 24 cryptocurrencies and compares these to overall market benchmarks, challenging the belief that there is a significant impact on cryptocurrency prices - the "halving". From the conclusion of the study, the divergent and seemingly random results before and after the halving suggest that the underlying factor driving prices is not a shift in supply and demand dynamics, but an event that changed fundamentals during this period.

The following is a summary of the report:

One specific question we decided to explore was whether, at a given point in time, the halving events of cryptocurrencies statistically lead to different return (yield) curves, and do halving cycles actually perform better than the overall market?

Basic conclusion:

1. According to statistical regression, in the months before and after the miner reward halving, the performance of cryptocurrencies that experienced the halving event did not outperform the market.

2. After regression analysis, the distribution of returns of a crypto asset before and after the halving is the same as its return distribution at other times, and is highly significant. There is no evidence to show that changes in supply and demand dynamics lead to abnormal pricing behavior.

3. LTC outperformed the market in the months before both halvings, but after the first halving, its performance fell to the bottom of 25%.

4. BTC’s performance is completely opposite to LTC’s. Before the halving, its performance was poor relative to the overall market, but after the halving, its performance was better than the market.

Every financial market needs a narrative (or narratives) that attempt to explain complex and opaque market behavior, but cryptocurrency investors don’t have a lot of historical data to refer to. This has led to a variety of unproven belief systems that are widely accepted as correct despite a lack of supporting evidence. One of these narratives revolves around the Bitcoin halving event, which can be summarized as follows:

The effect of the halving of Bitcoin rewards is that miners will not sell the mined coins immediately, which in turn will create an imbalance between supply and demand, which will drive the price up significantly.

Perhaps it was at this time, in Q2 2019, that commentary around the “halving” narrative grew exponentially. If you followed both traditional and social media discussions of the upcoming reduction in miner rewards for the Bitcoin and Litecoin blockchains, it would feel like the narrative was a fait accompli and all you needed to do was HODL to reap the outsized returns. While this narrative is certainly plausible as a logical theory, it is equally possible that we are dealing with an illusion of validity and that the previous bull run was simply the result of rising levels of speculation within the asset class.

Limited sample sizes and historical data make it particularly difficult to validate any narrative in this space. Therefore, to test the widely accepted narrative underlying demand and supply theory, we collected data for 32 halving periods for 24 crypto assets (full list at the end of this article), and compared across an additional 320 markets. We then compared performance 1, 3, and 6 months before the halving; 1, 3, and 6 months after the halving; and non-halving periods:

1. Analyze the performance of cryptocurrencies with and without halving of miner rewards in the same period, and draw their respective quartile matrices.

2. Focus on the price performance differences between the halving period and the non-halving period in the time cycle of a crypto asset itself.

Before discussing the results, there are actually two implicit assumptions as premises:

The halving results in lower miner revenues and an immediate change in supply relative to demand, an effect that will quickly be reflected in the price of a crypto asset.

Generally speaking, cryptocurrencies that experience a halving will outperform the rest of the market in the period following the halving, as one group of assets experiences reduced selling pressure from the mining community after the halving, while the other group does not.

Comparison of asset halvings and market Sharpe ratios over the same period. Source: Strix Leviathan Research

Comparison of Sortino ratios between asset halvings and the market over the same time frame. Source: Strix Leviathan Research

After completing our analysis, we found that the halving event has limited impact on price action. Looking at total returns, Sharpe ratios, and Sortino ratios, we can see that assets that experience halvings do not perform better than the rest of the market, both before and after the halving. In Bitcoin (BTC) and Litecoin (LTC), the two most famous cryptocurrencies, the “halving” talk is the most, but we can see diametrically opposite performances.

LTC outperformed the market twice in the first half of the year, but fell into the bottom 25% of the market in the six months after the halving. On the other hand, BTC lagged the market before the halving, but after the last halving, its market performance ranked in the top 25% of the total sample data. This difference and the seemingly random results before and after the halving indicate that the fundamental factor driving the price increase is not the change in supply and demand dynamics.

Source: Strix Leviathan Research

*LTC's second halving will take place on 8/5/19

**The first BTC halving is not included due to lack of comparable and reliable data

Furthermore, by regressing each asset on different time periods, we can further prove that the halving event has limited impact on market prices. We found that at a 99% confidence interval, the distribution of returns during an asset's halving period is roughly the same as the distribution of returns outside of the asset's halving period. In other words, we did not find any evidence that the halving event causes abnormal price movements. In fact, we are experiencing an illusion caused by the environment. Everyone thinks there is an impact, and that is an impact.

Comparison of the distribution of returns during asset halving periods and the distribution of returns outside asset halving periods.

Source: Strix Leviathan Research.

Through the previous statistical analysis, at least from the analysis of the data, we can see no direct correlation between the halving event and the significant changes in Bitcoin prices. Regarding Bitcoin, Bitcoin may have experienced higher performance than the market due to the widespread belief of cryptocurrency enthusiasts. However, when discussing broader asset classes, the lack of evidence to support this theory suggests that BTC's previous bull run is also likely to be the result of other factors. In addition, we recommend not to infer other single markets from the sample size of a single market.

Surviving in a noisy world

In conclusion, there are many people in the cryptocurrency market who want to explain such random market fluctuations with some cause-and-effect relationship. Cordeiro and Masucci put it succinctly: "The world of financial markets is filled with thousands of logically rigorous and well-thought-out theories that often do not hold up in practice."

Those who invest in Bitcoin and other cryptocurrencies need to be wary of this bias. Some of the most successful performances by “top” cryptocurrency traders may not be due to their skill, but rather pure luck. It is speculated that many market fluctuations triggered by major news events may simply be random phenomena. Many conspiracy theories, such as Tether’s price manipulation theory, which uses additional issuance to influence the $150 billion Bitcoin market, are forced to use causal relationships to explain certain phenomena. The changes in Bitcoin’s returns before, during, and after the halving are more likely due to rising levels of speculation rather than supply and demand imbalances caused by the halving itself.

People crave causality, and the crypto market media tries to force a narrative on most people. In a world filled with noise, it’s important to be skeptical. But if you believe Bitcoin (or other cryptocurrencies) will continue to trend upward, then perhaps the most reasonable strategy is to enter the market over a long period of time with dollar cost or value cost averaging and ignore the noise.

Original link: https://cryptoslate.com/research-finds-bitcoin-litecoin-halvings-do-not-impact-price/

Research report cited in the article: https://strixleviathan.com/blog/2019/7/21/the-myth-of-cryptocurrency-halving-events-a-deeper-analysis

Translation: Jessie @ Orange Book