New study says Bitcoin and Litecoin halvings won’t impact their prices

Finding causal relationships

People crave causality, and the cryptocurrency market is the exact opposite of what people want—a near-perfect machine of randomness and volatility. Nonetheless, people’s desire for causality leads mainstream media to construct narratives around potentially arbitrary price changes, attempting to explain why.

"Bitcoin prices rebounded after plunging at Libra hearing," Forbes wrote. According to Reuters, a "mysterious order" triggered the start of the 2019 bull run; technology media QZ said that USDT issuance is the root cause of Bitcoin's recent recovery.

However, even phenomena with a logical basis can be susceptible to causal exploration. Cryptocurrency enthusiasts generally believe that a block reward halving will lead to price increases. The logic is sound, if miners make less money, then there should be less seller pressure, and therefore, the reduction in supply should cause a corresponding price increase.

Litecoin has recently caught the attention of mainstream media. From a low of $22 in December 2018 to a new high of $130 in July this year, LTC surged 480%, becoming one of the few assets to outperform Bitcoin during the Bitcoin bull run. Publications including CryptoSlate attributed the price increase to the upcoming halving. Data suggests we were wrong.

Research on the price impact of halving

Strix Leviathan, a Seattle-based startup, specializes in designing and operating trading algorithms for the cryptocurrency markets.

The researchers analyzed 32 halvings across 24 cryptocurrencies and compared them to the overall market benchmark, evaluating each cryptocurrency’s performance six months before and after each halving, and comparing it to cryptocurrencies that did not experience a halving event in the same time frame.

“The divergent and seemingly random outcomes before and after the halving suggest that the underlying factor driving prices is not a shift in supply and demand dynamics.”

Strix Leviathan then compares the price of the halved tokens to their historical prices. Historically, price volatility should increase during halvings. However, the researchers found that tokens that experienced halving events did not experience significant volatility or returns before or after the halving.

“We find that the distribution of returns during the asset’s half-life is statistically identical to the distribution of returns outside of the half-life at a 99% confidence level. In other words, we find no evidence that halving events lead to anomalous pricing behavior and that we are dealing with an environmental illusion.”

In summary, the researchers concluded:

“We find no evidence that crypto assets experiencing halving events outperform the broader market in the months leading up to and following a reduction in miner compensation.”

“While this 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 increasing levels of speculation within the asset class.”

Surviving in a noisy world

Ultimately, the cryptocurrency market is dominated by those who attempt to impose causality on essentially random market movements. Cordeiro and Masucci put it succinctly: “The world of financial markets is filled with thousands of logically rigorous, well-thought-out theories that do not hold up in practice.”

Those who invest in Bitcoin and other cryptocurrencies need to be wary of this bias. “Top” traders may be in such a position not because of their skills, but purely out of luck. Many market movements allegedly caused by large news events may simply be randomness or conspiracy theories, such as Tether price manipulation driving the $15 billion Bitcoin market, may falsely use cause and effect to prove the theory.

In a noisy world, it’s important to remain skeptical. But if you believe that Bitcoin (and 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, ignoring the noise and taking advantage of the long-term trend.

This article comes from "Deep Chain Finance"