Financial Markets and Seasonality

A very important concept in traditional financial markets, that CryptoForecast is working on, is seasonality. While we are working on seasonality in cryptocurrency market, we have decided to write a brief article to explain how seasonality was born and how was originally studied in traditional markets.

It is a phenomenon whereby prices (or other particular factors, such as volumes) behave predictably over time. More specifically, they follow some particular patterns that tend to repeat over time. For example, on annual or monthly timeframes.
These patterns are largely attributable to human psychology (as described HERE in a study by the University of Toronto). Of course, there are relationship to economics and other factors.

Seasonality: a long story

For several decades, seasonality has been observed in financial markets all around the world. It is one of the many proofs of how financial markets are less efficient than anyone might think, in the sense that it is possible to overperform them, even if with enormous difficulties.

These cycles work non many timeframes for various reasons. For example:
1) A study by three Anglo-Saxon universities, found evidence of an annual cycle on American government bonds due to the effect of winter darkness on the human mind
2) There are evidences of monthly cycles in stocks. (See HERE for example: a research that shows how shareholder returns change between the beginning and end of each month).

Seasonality also occurs on many markets, also different from each other (see HERE for example, a study on seasonality in the precious metals market, which identifies a particular pattern on platinum in September and on weekends on gold and copper).

Of course, the market also moves for reasons other than seasonality. As a consequence, it can sometimes happen that an analysis based on this study, even if correct, has more or less bad performances: under the seasonality, in fact, there is a complex system that moves in many ways that are very difficult to understand and sometimes deviates from the seasonality.

More generally, however, these seasonal patterns have a great effect on our entire financial system. For example, an analysis conducted in 2006 by the University of Austin, Texas (see HERE) showed that the performance of hedge funds too have a seasonal component.

Price seasonality in S&P 500 market. The months with greater price increase are april and december.
Market price seasonality has been studied for decades in traditional markets.
Price seasonality in S&P 500 market. Seasonality has been studied for decades in traditional markets.

Seasonality in Bitcoin and Cryptocurrencies

In such an inefficient market as that of cryptocurrencies, we can imagine that there is a certain seasonal component.
In the 70s, when seasonality was discovered in the stock markets, many more “skilled” operators (for example, investment funds managers) immediately started buying before the days of the week when the price rose on average. By doing this, they “interfered” with the seasonal anomaly and making it more complex to analyze.
Ideally, in the long term, if for example prices on average rise on Friday, the more “rational” operators will start buying on Thursday. At that point, prices should start to rise already on Thursday, so people will start buying earlier, on Wednesday, and so on. In short, the so-called “rational operators” should, in the long run, cancel or at least “divert” the seasonal anomaly.
In the crypto and particullary Bitcoin market this type of rational operator is not very present; However, it must also be said that, being a young market, it is not easy to study seasonality.
In fact, such an analysis requires two things: statistical tools and a dataset collecting observations for many years (better decades). This dataset allows you to see if there are patterns that repeat over time. If you think about it, it’s quite logical: if I want to see a pattern that repeats itself over time … I need to observe it for a long time.

In conclusion, seasonality offers a broader vision for understanding the markets, basing its power on the amount of historical data available, improving its composition and accuracy over time. For this reason too, the analysis and study of markets are complex arts and require continuous and in-depth study.
Because of this amount of study required, analyzing the seasonality in the cryptocurrency market is an extremely difficult task. Cryptoforecast team is trying to analyze this factor. Studying seasonality can lead us to a better understanding of market and give us an additional reading key to try to put order in the cryptocurrencies world that offers us extraordinary opportunities, both human and financial, and deserves to be better understood.

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