The effect of the cryptocurrency halving event

This paper delves into the effects of cryptocurrency halving events, a mechanism intricately linked to blockchain technology. Perceived as shaping the scarcity narrative, these events make certain cryptocurrencies regarded as inflation hedges and modern stores of value. Contrary to expectations of a bull market surge, our results reveal a negative cumulative average abnormal return around halving dates, suggesting a “scarcity narrative curse.” Looking into the underlying mechanisms, we find that attention-driven buying is the main reason for this negative market reaction, not risk compensation. This is evidenced by the increased trading volume before halvings and subsequent return reversals. Notably, more pronounced negative returns in the Bitcoin ecosystem and during first-time halvings underscore the “investor attention” channel. Our research challenges the belief that scarcity promotes value and helps understand and improve cryptocurrency market behavior and decision-making.