Strix Leviathan, a company building institutional-grade trading algorithms, has conducted research that leads them to believe there is no correlation between cryptocurrency returns distributions, and block reward halving events. This is contrary to popular belief that the disinflationary supply schedule changes the equilibrium demand-supply zone, July 21, 2019.
Statistical Distribution Shows No Correlation
Bitcoin and Litecoin use the same block reward halving schedule, though they do not coincide as Litecoin is much younger than the Bitcoin network. Strix Leviathan’s research shows that both assets react in different ways before and after the halving event has taken place.
Litecoin tends to outperform the broader crypto market before its halving but performance falls to the bottom 25 percent of the market after the halving is complete. Bitcoin, on the other hand, displays poor performance before the halving and skyrockets in the weeks after the halving has been implemented.
A probable explanation for this is demand from the market. The main investment thesis with a halving event is that the gradual disinflation will reduce supply and drive demand, leading to a premium in price and appreciation in value. However, since demand is being artificially driven in a systematic manner, if initial demand is relatively low – like in Litecoin- it doesn’t give the price a significant boost.
With Bitcoin, demand always exists and new investors and users are always coming into the market, so the supply shock does indeed play a vital role in propelling price. Halvings are also a mental game; Litecoin’s surges before the event can be attributed to investors flocking to it expecting the supply shock to give them huge returns. Bitcoin’s great performance after the surge can be accrued to the natural demand that exists for it in the market.
Young Market, Redesigned Dynamics
The entirety of the cryptocurrency market is incredibly young, with Bitcoin having been first run by Satoshi about 10 and a half years ago. There isn’t much historical data to go back on, so market participants are often fooled by shallow data points that show correlation but do not explain causation.
Cryptocurrencies that are experiencing a block reward halving do outperform the market in the long term, so there is some merit to the argument that halving’s create value. However, a time series analysis revealed that the effect of the halving itself on market price was negligible, which means a lot of the effect can be accrued to the irrationality that occurs from this.
Markets tend to become more efficient as time goes on, because of the development of financial infrastructure and increase in historical data. There is no doubt a lot of myths will be dispelled in the future as researchers gather more evidence to justify their views.