# 1 WHY SEASONALITY IS IMPORTANT
The underestimated analogy adds value
I am starting this post by attempting to make seasonality more clear and visible in the Crypto space. Investing in Crypto currencies is relatively new in markets, and most Cryptos only have short historial performance. Bitcoin has the longest of sufficient trading data history (2011 - present 2021). For commodities, the anology and phenomenon of seasonality is more known, and with a much longer track record. We will get back to the commodities in upcoming posts.
Seasonalities are in my opinion underestimated, and it is too little used frequently as a tool in the financial industry. Academic studies and extensive research show seasonality is to be brought into deeper considerations when it comes to investing in financial markets becuase of its performance. Let’s make it useful and visuable to all.
Looking at seasonality could be very helpful because it shows you how prices have behaved in the past, and thereby could act as a 'guidance' going forward. In this series of posts, you will have access to up-to-date seasonality charts for selected Cryptos and Commodities.
A timing-point as a peak or valley, could act inverse to historical price movements. And instead of turning from the valley to a peak / peak to a valley, actually accellerate an already strong existing trend. You must always be aware of this and make sure a stop loss is placed on your investment at a suitable level to avoid pitfalls. I would say, a stop loss is 100% essential for you investments to be profitable.
THE KEY TO SEASONALITY
Seasonality is a characteristic of a time series in which the data experiences regular and predictable changes that recur every calendar year.
Any predictable fluctuation or pattern that recurs or repeats over a one-year period is said to be seasonal. In Bitcoin, it is scientifically evident that “seasonality patterns could serve effective to construct practical investment strategies1”.
THE INVISIBLE CHART
First, a diagram of the price development of Bitcoin in 2021 in a single coloured line chart.
During the year, there are great price fluctuations for any financial instrument.
For Bitcoin there are generally 5 major peaks, and 5 major vallies within a year. From a valley to the upcoming peak it takes an average of 29 days. Could be shorter could be longer. From a peak to its next valley it takes about 39 days. Could also be shorter and longer. The downturns lasts on average 10 days more than the upswings to the respective peaks.
Looking at the chart above, is it difficult or easy to see what periods are historically strong- or weak? - Very difficult and invisible. It is why you need the seasonality tool, which will tell you to stay away at certain times, invest ‘more’ at times and when to await for the next opportunity.
Let’s say you want to invest in Bitcoin. For a shorter period for ex. 2 months, or a longer period, let’s say a year. It does not matter for what I am about to show you. This will suprise you.
THE VISIBLE CHART
Take a look at the line chart above again, and now look at the chart below. It is also showing Bitcoin in 2021, but in a seasonality chart format. As the clock ticks, the colour of the price development changes according to the seasonality pattern we are currently in. This is based on formulated historical facts. Up to 10 years of historical data is crunched to make it easier to see the phase of today’s strength or weakness.
The anology explains how Bitcoin has behaved in previous years, and could be essential to what’s next. I guess most of us want to see what could be next. Research and trading I have done shows you are much better off actively taking tradable actions around seasonal turningpoints.
As of December 13th close, and purly acting on seasonality returned + 189% for 2021. Buy an hold (hodl), meaning you bought January 7th and held the position during the same period returned ‘only’ + 66%.
6 months into the period, the seasonality strategy was + 64%, and the hodl strategy was slightly in the negative territory. One advantage of playing seasonality is the risk aspect by downplaying your exposure and allocating it to the ‘more optimized and attractive’ investment periods.
When you look at the chart above, there is no doubt; The chart is much easier to read than the regular line chart on top of the page. You clearly observe the weak seasonality periods in red, as well as the strong seasonality periods in blue.
There is never any guarantee that the very same positive or negate periods will occur at the exact same time of the year, year after year. Markets are dynamic and changing. Seasonality patterns do shift.
This latest graph gives an even more detailed picture. The coulored vertical periods of strength and weakness are quite visuable when set in conjuction to the price line. The seasonality periods are set up a year in advance and expresses the Bitcoin price development. Current period is historicaly a strong period, but Bitcoin is trending counter wise. Remember the stop loss I told you about earlier? This is an example of why it is important. Either you can ride out the seasonal patterns in full, or you can add a stop loss to every seasonal investment entery.
The seasonality overview show you how Bitcoin has performed in the past, and could thereby act as a guideline for the future.
Some seasonal periods also act inverse. An excisting trend may quickly spark at the so called seasonal turning-point. The implementation of stop loss is therefore essential to minimize risk to a “countertrend season2”.
Being aware of seasonality, can much improve your investment outcomes, it may protect your investments, it makes you aware, and you should increase you success in the markets.
Was this post clear to you? If you have comments or questions, do not hesitate to contact me. Going forward, I will continuously share seasonal variation status for various Crypto currencies and Commodities.
Disclaimer:
All trading is soley at your own risk. Trading financial instruments involves high risk to your capital. Make sure you fully understand how your investments work, and that you can afford to take the risk of losing your money.
Research from ‘Seasonality in the cross-section of Cryptocurrency returns’, May 2020.
A countertrend season is a season acting against the historical trading pattern. When this occurs it make the excisting trend explosive or contine. The outcome could be two seasonal periods in one direction.