Searching for cause and effect
People crave cause and effect relationships. The crypto markets are the opposite of what people want—a near perfect machine of randomness and volatility. Nonetheless, people’s desire for cause-and-effect cause the mainstream media to build narratives around likely arbitrary price changes.
“Bitcoin prices recover after tumbling on Libra hearings,” wrote Forbes. A “mystery order” triggered the beginning of the 2019 bull market, reported Reuters. Tether issuances are the underlying factor behind Bitcoin’s recent resurgence, suggested QZ.
Yet, even phenomenon with basis in logic may be susceptible to the search for cause and effect. One widespread belief among cryptocurrency enthusiasts is that the halving of block rewards causes prices to increase. And, the logic is sound. If miners earn fewer coins then sell-side pressure should decrease. Reductions in supply, consequently, should cause an associated increase in prices.
2012: 10m before halving btc $5, at halving $12
2016: 10m before halving btc $237, at halving $627 pic.twitter.com/eLUVai1vp7
— PlanB (@100trillionUSD) July 19, 2019
Litecoin has more recently brought this narrative to mainstream attention. From a December 2018 low of $22, LTC surged 480 percent to new highs of $130 by July—becoming one of the few assets to outperform Bitcoin during its bull run. Publications, including CryptoSlate, pinned the price increase on the upcoming halving. The data suggests we were wrong.
Research on the price impact of halvings
Research conducted by Nico Cordeiro and Ava Masucci from Strix Leviathan, a Seattle-based startup that specializes in engineering and operating trading algorithms for the cryptocurrency markets, challenge the belief halvings materially impact coin prices.
The researchers analyzed 32 halvings across 24 cryptocurrencies and compared these to an overall market benchmark. Performance of each coin was evaluated six months before and after each halving and compared against cryptocurrencies not going through a halving event in the same timeframe.
“The divergence and seemingly random results before and following a halving suggests that the underlying factors driving price is not a shift in supply and demand dynamics.”
Then, Strix Leviathan compared halving coins against themselves. Historically, variations in price should increase during a halving period. Yet, the researchers found that coins undergoing a halving event did not experience outsized volatility, or returns, before or after a halving.
“What we find is that the return distribution of an asset’s halving periods versus the return distribution outside of its halving periods reveals that they are statistically the same at a 99 percent confidence level. In other words, we did not find evidence that a halving event results in abnormal pricing action and we are dealing with a circumstantial illusion.”
In summation, the researchers concluded:
“We found no evidence that cryptocurrency assets experiencing a halving event outperform the broader market in the months leading up to and following a reduction in miner rewards.”
“While the narrative is certainly feasible as a logical theory, it is equally possible that we are dealing with an illusion of validity and previous bull runs were the result of nothing more than increasing levels of speculation within the asset class.”
Surviving in a world of noise
Ultimately, the cryptocurrency markets are dominated by people attempting to force cause-and-effect on largely random market movements. “The world of financial markets is filled with tens of thousands of logical and thoughtfully conceived theories that don’t turn out to be true in practice,” Cordeiro and Masucci said succinctly.
Those invested in Bitcoin and other cryptocurrencies need to be wary of this bias. ‘Top’ crypto traders could be in their position not because of their skill but out of sheer luck. Many market movements supposedly caused by large news events could be mere randomness. Conspiracy theories, such as Tether price manipulation moving the $150+ billion Bitcoin market, could be falsely drawing on cause and effect to prove the theory.
In a world of noise it is important to be skeptical. But, if you believe that Bitcoin (and other cryptocurrencies) will continue trending up, then perhaps the most reasonable strategy is dollar-cost or value-cost averaging into the market over a long period of time, ignoring the noise and taking advantage of the long-term trend.
Disclaimer: Our writers’ opinions are solely their own and do not reflect the opinion of CryptoSlate. None of the information you read on CryptoSlate should be taken as investment advice, nor does CryptoSlate endorse any project that may be mentioned or linked to in this article. Buying and trading cryptocurrencies should be considered a high-risk activity. Please do your own due diligence before taking any action related to content within this article. Finally, CryptoSlate takes no responsibility should you lose money trading cryptocurrencies.