Bitcoin and seasonality: What investors need to know

Seasonality refers to the occurrence of regular and predictable changes in a data set at particular intervals throughout the year. In financial investing, seasonality refers to price fluctuations that occur in an asset class at the same time intervals year and year again. Seasonality can be found in a range of different assets such as equities, the US dollar, and even bitcoin.

What are seasonality effects in the equity markets?

You might have heard of the expression “sell in May and go away” or of the “Santa Claus rally” or even the “January effect”. These are three seasonality effects that commonly occur in the equity markets.

“Sell in May and go away” refers to selling your equity holdings in May as the summer months usually lead to a decline in stock prices. The “Santa Claus rally” refers to December historically having been an up month and the “January effect” refers to stock markets usually rallying to start the year.

A large amount of academic research has gone into the seasonality effects found in the equity markets with the aim to substantiate or to deny the validity of seasonality. For example, Ben Jacobsen and Cherry Y. Zhang from Massey University in New Zealand published two research papers in 2012 - Are monthly seasonals real? A three century perspective and The halloween indicator: Everywhere and all the time - to find conclusive evidence for or against seasonality effects in the stock market.

Their research - which looked at U.S. stocks - found that April and December have been the best months, while the worst months have been May and September. It also showed that the January effect worked very well in the past but in recent years, January has been an underperforming month. Moreover, the research illustrates that the winter months are more profitable for stock investors than the summer months, which would suggest that “sell in May and go away” would not be the worst advice for long-term stockholders.

What also needs to be noted, however, is that you have a breakdown of correlations in specific time periods and the seasonality effects were stronger in the past than in recent years. Hence, it is good to be aware of seasonality in the equity markets, especially as long-term investors. However, for short and medium-term holders they are not necessarily the best indicators to follow as not every year is the same.

Seasonality in the US dollar

While a degree of seasonality has been proven in the equity markets, it may come as a surprise that the seasonality phenomenon can also play a role in the largest and most liquid currency in the world: the US dollar.

When analyzing historical price data of the US dollar, investors can see that the dollar has generally been stronger in the first half of the year. January is traditionally a flat-to-up month for the dollar while spring and early summer are usually the strongest months for the greenback. Conversely, mid to late fall tend to be the weakest months. These seasonality effects can be felt strongest in the EUR/USD, USD/JPY, GBP/USD, and USD/CHF currency pairs.

However, it is important to note that the seasonality effects in the currency markets are not as strong as in the equity markets and should, therefore, be taken with a grain of salt and not necessarily as a basis for making short to medium-term investment decisions. If anything, seasonality effects in the US dollar can be useful information for long-term foreign currency holders such as corporates. 

How seasonality affects Bitcoin

Interestingly, seasonality effects have also been visible in Bitcoin’s price development despite the relatively short history of the leading decentralized digital currency.

While research in this field is still fairly limited when looking at bitcoin historical price data, we can see that there is something of a reverse “January Effect” where the price of bitcoin tends to decline at the start of the year. This has been evident in the years 2012, 2014, 2015, 2016, and 2018. In that time period, only in 2013 and 2017, did the price of Bitcoin rally in January. While some may argue that the data set to make a judgment on a possible January effect in Bitcoin is too small, the limited historical price data we currently possess does show that it might be best to start the year with a defensive position in bitcoin.

Conversely, towards the end of the year, the price of Bitcoin has historically rallied. According to an analysis by TopDownCharts.com, January, May, and September have historically been bumpy months for Bitcoin holders but the year-end generally results in strong gains for bitcoin holders with December being a particularly profitable month for investors.

Therefore, from the limited price data we have on Bitcoin, we can so far conclude that there is somewhat of a “reverse” January effect and there is strong evidence for a Santa Claus Rally in cryptocurrencies. “Sell in May and go away” may also be good advice for bitcoin holders to a certain degree. However, not anywhere near as much as for equity investors. Finally, it also important to note that the second half of the year has historically shown stronger gains than the first half.

Armed with this information, long-term cryptocurrency investors could adjust their crypto asset portfolios at particular intervals throughout the year. However, it is important to stress that with the limited price data available, the effects of seasonality in Bitcoin and the cryptocurrency markets as a whole will need to be studied further in the future in order to come to a conclusive deduction.