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As we are observing financial markets day by day, we have noticed several repeating patterns. As a result, plenty of seasonality effects can be connected with a specific hour, day in the week/month, or even a more extended period. Regardless of the period, all effects have one common matter: abnormal performance during the timeframe. For example, there might be a large amount of capital that investors seek to allocate that creates upward pressure and stocks rise.
All the aforementioned effects are present in the developed markets that offer a long history either for empirical observations or thorough systematic analysis. Are there any seasonality effects in Bitcoin's market? Indisputably, the BTC has attracted many, but there is high volatility, and the market is truly dynamic.
One of the most recognized effects relates to the part of the day – the opening of the market, closing auction, overnight anomaly, intraday reversal, and many more daily effects were suggested by academics. However, the cryptocurrency markets are unique, and these crypto assets are traded 24/7. Therefore, there is no "open" or "close" time. Although we can map the hours to when traditional markets are open, cryptos can still be traded outside these hours.
The analysis shows that the hourly distribution of the daily returns is not uniform. There are several periods when the return is relatively small and economically insignificant. Furthermore, there are several hours when the BTC returns are above the average. In particular, the returns for 22:00 and 23:00 (UTC +0) seem to be the most economically significant.
Fundamental reason
Conversely to other widely recognized effects such as the Turn of the month, Payday effect or various strategies connected with rebalancing dates, the reason for the functionality of the BTC seasonality is not that clear. However, the most promising explanation could be connected with the opening hours of the other major markets/exchanges. Interestingly, all major markets are closed during this period. For UTC +0, the NYSE is open during 14:30 and 21:00, Tokyo Stock Exchange is also closed (it is opened from 00:00 to 06:00 of UTC +0 time), Hong Kong is also closed (it is opened from 01:30 to 08:00 of UTC +0 time), same as India (2:30 to 10:00 of UTC +0 time), and Australia is closed too (23:00 to 05:00 of UTC +0 time). Both London and continental Europe are closed during these significant hours since it is night there. Therefore, it seems that the best time to trade (and hold) BTC is when every other major exchange is closed. As a result, the seasonality might be a result of willingness to trade and the BTC market as one of a very few options to do so.
Additionally, based on the hourly return's distribution, the negative returns are insignificant, while several positive returns are statistically significant on the 5% level. From both statistical and economic points of view, the returns 22:00 and 23:00 dominate.
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Keywords
Market Factors
Confidence in Anomaly's Validity
Period of Rebalancing
Number of Traded Instruments
Notes to Number of Traded Instruments
Complexity Evaluation
Financial instruments
Backtest period from source paper
Indicative Performance
Notes to Indicative Performance
Estimated Volatility
Notes to Estimated Volatility
Maximum Drawdown
Notes to Maximum drawdown
Sharpe Ratio
Regions
Simple trading strategy
The investment universe consists of Bitcoin and the data are obtained from Gemini exchange. To exploit the seasonality, open a long position in the BTC at 22:00 (UTC +0) and hold it for two hours. The position is closed after the two hour holding period.
Hedge for stocks during bear markets
No – this long-only strategy is not performing well during bear markets, and cryptocurrencies are one of the riskiest assets to hold during periods of uncertainty.
Out-of-sample strategy's implementation/validation in QuantConnect's framework(chart, statistics & code)
Source paper
Padyšák, Matúš and Vojtko, Radovan: Seasonality, Trend-following, and Mean reversion in Bitcoin
Abstract: The cryptocurrency market is not negligible nor minor anymore. With the continuous development of the crypto market, researchers aimed to analyze novel cryptocurrencies thoroughly. An excellent starting point might be in other recognized effects from the developed asset classes. This research examines seasonality effects such as when the major NYSE opened or closed and their intraday, overnight, or daily components. Furthermore, we also examine the distribution of the daily returns and the returns that are significant. The results point to a simple seasonality strategy that is based on holding BTC only for two hours per day. The second aim is to examine trend-following and mean reversion strategies. The data suggests that BTC tends to trend when it is at its maximum and bounce back when at the minimum. These findings support the empirical observations that BTC tends to trend strongly and revert after drawdowns.
Other papers
Jahanshahloo, Hossein and Corbet, Shaen and Oxley, Les, Seeking Sigma: Time-of-the-Day Effects on the Bitcoin Network (
Abstract: This research investigates and tests for the presence of time-of-the-day effects on the Bitcoin network. Results indicate that NYSE trading sessions lead Bitcoin trading activity, both on the blockchain and centralised exchanges. Effects are found to have strengthened over time, however, simultaneously diminished at the weekend indicating significant exchange interactions, and that Bitcoin has developed somewhat outside its intended design parameters, and is influenced by other forces such as those originating from NYSE trading. While proponents consider Bitcoin trading to be `24/7', our findings suggest that both transaction and on-chain network activity are best described to be, at best, `12/5', presenting significant implications for traders, with regards to centralised exchange liquidity and the speed of their transaction inclusion on the blockchain. Finally, the role and influence of both algorithm and volatility traders cannot be eliminated.