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Bitcoin’s price is now just above the 7,000 level as a gloomy sentiment looms across the broader cryptocurrency market. While hype over the next BTC halving is gradually building as we wrap up 2019, the seasonal pattern shows that BTC markets might be relatively calm in Q1, before entering a stronger Q2. Meanwhile, BTC markets also have shown a constant higher trade volume during European trading hours.
How can day traders utilize these periods to minimize liquidity risk?
In the traditional world of investing, seasonal patterns are well known in different asset classes. For example, the US equity markets usually have better performance from November to April, and some weaker performance typically happens in the May-October period. “Sell in May and go away” would be an excellent example of that.
Even though markets will not repeat the same pattern every year, this seasonal pattern has been proven valid and adopted by many market participants.
Bitcoin has been in the market for more than a decade with its seasonality worth exploring. Data from Sentix and Bloomberg shows that since July 2010, Bitcoin has its best average monthly performance in April, May, October, and November. On the other hand, markets were relatively quiet in December, Q1, and especially during summertime.
The year 2017 is an excellent example of demonstrating that pattern. In April, BTC surged from the lower 1,000 levels to the 1,350 area, and it further rallied to 2,600 levels before finishing near 2,300 by the end of May. The strong performance can also be seen from October to November, when BTC prices rose from 4,200 to 10,000 levels.
In contrast, markets were bearish in September, when BTC plummeted from 4,900 to as low as 2,900 levels in the middle of the month.
Halving State of Mind
The next Bitcoin block reward halving is set to happen in May 2020, and it’s expected to be one of the most-watched events in the cryptocurrency space next year. The timing of the event could be interesting since May arguably has been one of the best-performing months for BTC over the past decade. With the hype over halving gradually building up, the market could expect to see some higher–than–average volatility in the coming May, and likely before and after the event occurs. But it remains unclear how much of the halving has already been priced into the current BTC market, or how much it will impact prices.
Weekend Is Quiet Time
BTC markets have also demonstrated a clear trade tendency in the weekly and hourly timeframe. Figure 1 shows that on average, Monday and Friday were typically the busiest days throughout the week, while the average trade volume at the weekend was significantly lower than weekdays.
Strikingly, that weekly data matches with the findings of Bitcoin Suisse Research. The firm studied BTC daily average returns by weekday since November 2014 and found that Mondays give the highest average daily gains, while Wednesdays were the lowest.
The firm also performed a weekly dollar-cost averaging strategy analysis, and it shows that Friday would have been the best weekday to invest within the same time frame.
European Afternoon More Busy
Interestingly, hourly trends were also becoming more noticeable in the BTC markets. Figure 3 shows that European trading hours (Asia late afternoon to evening) were some of the most traffic-heavy periods for perpetual trading, especially 1300 UTC and 1400 UTC (2100 HKT to 2200 HKT).
While geographical differences of crypto exchanges and their client bases could be a dominant factor in determining the active time of any given exchange platform, the trading habits and tendencies are becoming more evident on various exchanges.
Timing Is Everything
Traders and investors could minimize their liquidity risks by executing their trades during peak hours. Loi Luu, CEO and co-founder at Kyber Network once that the total cost of making a $1 million BTC transaction can run between $10,000 to $100,000 more than the listed spread on an exchange. That’s why having enough market depth is perhaps one of the essential elements when it comes to trading.
Just like other commodities, Bitcoin has shown its seasonality in the monthly, daily, and hourly context. Entering a trade on the right day and at the right time seems becoming more critical, especially for Hodlers that wanted to employ a cost averaging strategy. By studying the seasonal characteristic of cryptocurrency, traders and investors may be able to minimize their liquidity risks and improve the price discovery process with deeper market depth.
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
OKEx is a world-leading digital asset exchange headquartered in Malta, offering comprehensive digital assets trading services including token trading, futures trading, perpetual swap trading and index tracker to global traders with blockchain technology. Currently, the exchange offers over 400 token and futures trading pairs enabling users to optimize their strategies.
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