do halvings lead to bitcoin price pumps?
|Oct 10, 2018||Public post|| 3|
tl;dr: Qiao argues (with data) that the bitcoin halving does not by itself spark rallies or new bull markets. (Counterpoints welcome.) If you want to join our intense internal debates on crypto markets and fundamentals (and actually build the tools to resolve some of these debates), check out our careers page. Not an engineer? That’s ok. Join our analyst community.
The Bitcoin Halving Bull Meme - Messari’s Unqualified Opinions #13
(6 minute read)
Lately there’s been renewed hype that “bitcoin will pump around halving events.”
This is a bad thesis.
The idea works something like this. The price of Bitcoin is highly volatile, so miners generally cash out after mining new blocks. However, every four years (every 210,000 blocks to be exact), Bitcoin’s block reward halves. Less reward means less cashing out, and as a result, the selling pressure from miners decreases. With less selling, the market faces a supply shock (demand is unchanged), and that leads to a price rally.
Moreover, charts like the one below get thrown around on Twitter and Telegram to support this. Indeed, the price of Bitcoin does seem to be substantially higher after the halvings on 11/28/2012 and 07/09/2016.
Sounds like a plausible thesis and good supporting evidence, right?
Not so fast.
Because “halvings” are expected events, you can also argue potential market impact is priced in well ahead of time. In plain English, you cannot predictably beat the market by using public information such as the knowledge that block rewards will halve.
This is the famous “market efficiency” argument, and it’s a view I largely hold.
No market (Bitcoin included) is always 100% efficient. As a trader myself, I know this well. But I will say that the Bitcoin market appears efficient with respect to how it prices in halving events. Let’s look at the data.
Bitcoin’s Historical Returns
I’m a data maximalist.
If you look at the 2016 bitcoin halving, the returns of the market one week, one-month, and one quarter after the halving are mediocre. In 2012, the market performed well, but it still didn’t meaningfully outperform the historical average. At most, we have mixed results from two data points.
Some proponents of the halving narrative will argue that the price increase actually occurs before the halving, because traders start buying in anticipation of the halving. Unfortunately, the data doesn’t support this either. The returns prior to the halvings are still disastrous compared to the historical average.
* To calculate the historical average, we compute the 1-week, 1-month, and 1-quarter return for every day since 2009, and then take the average across all the days. If you bought Bitcoin on any random day, what would your returns look like be?
Block Rewards vs. Trading Volume
One plausible explanation of this lack of causal relationship between halving and returns is that block rewards are way too small compared to trading volume. According to OnChainFX, the change in block reward during the next halving will be nearly 3 orders of magnitude lower than the daily trading volume.
In other words, the decrease in supply from miners is miniscule relative to aggregate demand. Note that this argument is orthogonal to the market efficiency argument.
The above evidence suggests the halving thesis is unfounded. It’s more likely that other day-to-day or month-to-month trends move the market to a much greater degree, and bitcoin’s known scarcity is a long-term bullish trend that has helped to steadily drive long term growth.
The more interesting question we should ask ourselves is: what can we learn from the hype around unfounded theses more generally?
For starters, always look out for confirmation bias.
It’s a dangerous habit that can cost investors a lot of money. We have subconscious tendencies to look for evidence that support our existing beliefs and, in particular, our current investment positions. People who are short tend to overweight information unfavorable to Bitcoin. Those who are long Bitcoin tend to overweight information that’s favorable to Bitcoin, which could explain this new “wait for the halving” meme.
No one is immune from confirmation bias. Not even the best of the investors.
But the best investors are conscious of their own cognitive deficiencies, and work very hard to mentally fight against them with good, statistically significant, data.
Two data points isn’t enough.
Debate with me on Twitter. It’s one of the best ways to improve our understanding of the world together.
[TBI Note: Qiao’s data is pretty interesting, but a teacher once told me that as a precious snowflake my feelings matter, so I’m going to use those as a counter-argument. I don’t like that Qiao’s data conflicts with my feelings, so I reject it.]
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