Graphing Digital Assets
Month in Review — September 2023
Crypto Seasonality in Action
Source: Yahoo Finance (BTC price data from 09/17/2014 - 09/30/2023)
Our research on the historical seasonal trends in cryptocurrency markets reveals consistently low returns in September, aligning with the '“Sell in May and Go Away” effect. Characterized by reduced summer trading, the phenomenon results in lower market momentum and subdued performance extending into September. Regulatory uncertainty contributes to this effect as US regulators defer decisions until after summer recess.
Last month, BTC prices increased by approximately 4%, the higher end of the expected September range. Despite this, BTC’s overall performance was in line with historical seasonal trends: low trading volumes, minimal volatility, and a median daily return of 0.0%. Also in line with past trends, regulatory uncertainty persisted, as the SEC postponed their decision on the approval of multiple spot BTC ETF applications.
Given these recurring seasonal patterns, we can anticipate heightened price action in the coming months.
Volatility Crossover
Source: Derebit Metrics, September data available from 09/21/2023 to 09/30/2023.
Ether is generally perceived as being more volatile than bitcoin. Yet, in September, bitcoin's implied volatility surpassed that of ether for at least 20 consecutive days, as Deribit's 30-day BTC implied volatility index exceeded that for ETH during this period.
Briefly observed in March as well (for the first time in 2 years), this deviation from the norm suggests reduced liquidity in bitcoin. Investors favor less risky assets under the macro backdrop of rising U.S. Treasury yields, stagflation risks, a stronger dollar, and the threat of a U.S. government shutdown.
Capitalizing on Dispersion
The performance of statistical arbitrage strategies depends on relative movements between assets as well as expected vs actual price changes for each asset. We can evaluate this opportunity set in the crypto markets by examining normalized standard deviations for altcoins.
The top graph analyzes the standard deviation of a selection of altcoins over the past year. These altcoins often deviate by more than 1 standard deviation from the mean (e.g., expected value), resulting in a general trend that implies a declining range over the past year.
The bottom graph highlights inter-coin market dynamics by plotting mean absolute deviation (MAD) from the average z-score of altcoins. Note the extent to which different coins deviate from their expected movements has NOT decreased over the same period. On the contrary, it reached its highest level in recent months.
This analysis demonstrates an increase in alpha opportunities for statistical arbitrage strategies that exploit inter-coin relationships. The common notion of poor BTC and ETH performance in a low volatility market environment does not hold true for altcoins.