Why seasonality in crypto markets is important

Sep 26, 2018 · 5 min read

Tracking market prices & seasonality narratives to observe how they help in explaining digital asset market movements — by Element Digital Asset Management team

(These observations first appeared in Asset Management’s Weekly Thoughts)

Why should we look at seasonality when observing the price of crypto?

The reasons for using seasonality to predict asset prices are these:

  1. Prices are determined by the decisions of people and the interaction that occurs when they buy or sell that asset, and
  2. Human behavior generally depends on the calendar (ie. vacation days, the work week, or other official holidays created by governments).

Despite the danger of data mining when looking for seasonal patterning, the reason it might exist in asset price is rationally based. Indeed, most macroeconomic gauges have a strong seasonal element and the government puts a lot of effort into developing models whereby data reports can be seasonally-adjusted.

In the equity markets, for example, researchers have identified calendar-related inconsistencies around the turn of the month and year. When we consider that digital asset markets are very reliant on the sentiment of people and rarely anchored to any particular fundamental value, it’s reasonable to probe further into whether or not there is some sort of seasonality happening.

How can we assess calendar-related anomalies?

We chose a four-week return to smooth the data somewhat, ie. it’s easier to see what way prices are moving. The positive and negative indicator was chosen to deal with how bitcoin volatility has changed with time as it has matured into a legitimate asset class.

There are only a few years of reliable bitcoin price data, but some interesting observations immediately emerge:

Chinese New Year

We wonder whether that is actually the sequence of events that is responsible for the market sell-off (for example, why doesn’t it exist during the run-up to Christmas?), but major market weakness has been observed in January and February for the past four years — roughly lining up with the Chinese New Year holiday.

Another narrative, of course, is that investors may defer selling their digital assets until after the first of January so capital gains on the sale won’t be applied until the subsequent year.

Annual capital gains payouts

For the last five years, bitcoin has averaged a 110% return per annum, generating a meaningful amount of capital gains for investors per year. Altcoins have seen even greater gains. Every year without fail, there has been a downturn in the market in late-March/ early-April, as some investors liquidate capital from crypto markets to pay their taxes.

This sell-off is not just seen in the crypto market — in April 2000, following the peak of the internet bubble, the NASDAQ Composite fell 9% in the week’s leak up to the tax cutoff.

The fall trading season

There is a greater internet usage during the fall and winter months. And, as mentioned above, investors may delay selling until January to defer taxes. But neither of these explanations seem very compelling, and this may just be a non-recurrent coincidence.

Self-fulfilling prophecies

These insights first appeared in Weekly Thoughts, where the Element Digital Asset Management team dives into the state of the crypto market to provide unique and current insights and observations.

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Digital Asset Advisors. Traders. Stewards of Value. Nerds. It's A Brave New World.


Coinmonks is a non-profit Crypto educational publication. Follow us on Twitter @coinmonks Our other project — https://coincodecap.com

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