What History Shows us About the Crypto Market During Summer
The old stock market adage “sell in May and go away” has proven to be right more often than not. Specifically, this Wall Street advice refers to selling your stocks in May to then re-enter the market in October as June, July, August, and September have historically been the worst performing months for stocks.
According to a study by Barron’s, if you would have sold your equity portfolio at the end of May to re-enter the market in October, you would have generated 0.7% more returns on average than investors who stayed invested during that period over the past 30 years.
But how does has this strategy fared in the crypto markets, and should you take that advice in 2019?
Seasonality in cryptoassets: the January effect
Almost exactly one year ago, Cryptonews.com published insights into the topic of seasonality in the bitcoin market and has found that the so-called “January Effect” does not exist for bitcoin.
The January Effect refers to equity markets having historically rallied in January as investors deploy new capital and are generally optimistic about the new year. However, bitcoin (BTC) has failed to start the first weeks of the year with a rally in the past years.
2014: 60% decline by April before a brief recovery period
2015: 70% decline over the first two weeks of January before the market recovered
2016: 20% decline over the first three weeks of January before the market recovered
2017: 25% decline over the first two weeks of January before the market recovered
2018: 70% decline by February before a brief recovery period, followed by another sell-off
2019: Almost 6% decline in January, before the market started grinding higher
Even in 2017, when we saw an impressive one-year rally for bitcoin, the price of bitcoin dropped by 25% before it started to change its course.
But what about “sell in May and go away?”
Seasonality in cryptoassets: sell in May and go away
Looking at the past six Mays, the price of bitcoin has rallied by 27% on average in that month. Below, you can see a breakdown of bitcoin’s returns during May.
May 2014: +38%
May 2015: -1.5%
May 2016: +18%
May 2017: +71%
May 2018: -18%
May 2019: +57%
Moreover, we can see that during the time period from May 1 to October 1, the price of bitcoin has rallied by around 43% on average. However, this average is not the best metric to make any valuable conclusions. Below you can view May to October bitcoin returns for the past five years.
May to October 2014: -14%
May to October 2015: 0%
May to October 2016: 35%
May to October 2017: 221%
May to October 2018: -26%
Using seasonality as investment indicators
So, what can this information tell us about how bitcoin will perform over the coming summer months? Nothing!
Just because bitcoin has had - on average - a bad start to the year and a good summer months does not mean that these seasonality effects, which are based on a very short time series, will have any bearings on the future performance of bitcoin.
In fact, every investor knows (or at least should know) that past performance is no guarantee for future results. Just because the price of bitcoin has performed in a certain way during a specific time period does not mean that the same price developments will be replicated in a similar manner in the future.
Selling bitcoin now?
Looking at 2019, we can see that the bitcoin market is very different than in any of the years before.
Institutional investors have never been as involved in bitcoin as they are today. Moreover, the bitcoin trading ecosystem - consisting of regulated exchanges, newly-formed crypto custodians, and much more educated regulators - has never been as mature as it is today, which means more professional and institutional investors are poised to enter the market.
Additionally, we are only one year away from the next bitcoin halving, which will reduce the current Bitcoin mining reward (BTC 12.5) by half, and many believe that investors are starting to accumulate now in anticipation of a substantial rally in the coming year as a result of the reduction in newly mined bitcoin.
Finally, with the entrance of the likes Fidelity, JPMorgan, and Facebook into the world of digital assets, any remaining doubt about the legitimacy of cryptocurrencies has likely been shed by the general public as well as the business community. This bodes well for bitcoin as it remains the cryptocurrencies with the highest value and biggest brand name.
However, none of these factors, plus bitcoin’s historically well-performing summer months, can guarantee that the bitcoin rally will continue in the coming months as it has since the start of May even if “everything” points in that direction.
Bitcoin remains a highly volatile and illiquid asset class whose price can be influenced by a handful of whales who have deep enough pockets to cause intra-day price spikes by buying or selling a few thousand BTC. Moreover, we are still waiting on a decision from the G20 this summer on what a possible global regulatory framework for cryptoassets could look like. And finally, as every diehard HODLer has learned in the past, there can always be a black swan event that sends crypto prices south faster than you can hit that sell button.