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What Is the Crypto Halloween Effect? Why Investors HODL Until May

What Is the Crypto Halloween Effect? Why Investors HODL Until May

DailyCoinDailyCoin2024/11/01 01:22
coin_news.by:DailyCoin

Ghost stories are common tales told around Halloween to get people’s hearts racing, but there’s one that relates to and directly affects crypto : The Halloween Effect. 

Though the Halloween Effect has been a superstition in the world of stocks and finance for quite some time, it’s also been haunting the crypto market over the last few years.

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Though this is said to be a time of positivity and hope for investors, the data has shown mixed results on its effectiveness and reliability. So, is the Halloween effect an insidious trick or an appetizing treat for the crypto community to look forward to? 

Table of Contents

  • The Halloween Effect Explained
    • The Origins of the Halloween Effect
  • How Real Is the Halloween Effect?
    • Traditional Stocks
  • What Causes the Effect?
    • Winter News Coverage
    • More Liquidity
    • Efficient Market Hypothesis
    • Satoshi’s Ghost Myth
  • Criticisms of the Halloween Effect
    • On the Flipside
    • Why This Matters
    • FAQs

The Halloween Effect Explained

Source: Dailycoin.com

The Halloween Effect is an investment strategy in which traders buy assets on Halloween (October 31st), hold them over the next few months, and sell them off in May. 

According to this trading method, prices will start to rise throughout this period, reaching a peak in May, when they will reach their highest price limit, garnering profits for the investor.

However, as the name implies, the Halloween Effect is considered a strange anomaly with some rather mysterious qualities. This is primarily because the reasoning for why it occurs has been difficult to explain despite being around for decades. 

The Origins of the Halloween Effect 

There have long been rumors and predictions about where the trading strategy originated, but most scholars and business experts agree that it was born in the United Kingdom during the early 20th century.

At this time, business owners and upper-class families, primarily based in London, would leave for their summer vacations and then return in October to reopen, before leaving and selling everything off in May to repeat the cycle. 

This became so common that it became a popular saying: “Sell in May and go away; do not return until St. Ledger’s Day,” in reference to the final horse race of the season. 

As the years went by, the saying stuck, and the technique started to manifest itself in digital form through modern-day investors who focused on holding and eventually selling during this period.

In 2002, business scholars Sven Bouman and Ben Jacobsen looked deeper into the phenomenon. What they found was that, according to statistics since the 1970s, shares, stocks, and assets did indeed increase in value after Halloween and until May. They labeled this ‘The Halloween Indicator,’ which more commonly became known as the Halloween ‘Effect’ over time.

How Real Is the Halloween Effect?

So, does the Halloween Effect actually impact market prices? More importantly, does it relate to crypto?

According to the data , the crypto industry does, in fact, experience a rise in value, at least most of the time, between October and May. 

For example, the whole market increased by 55% between 2016 and 2017 and then experienced another increase of 127% between 2017 and 2018. 

2020 and 2021 similarly saw the Halloween Effect take action with a staggering market increase of 457%, and again the following years with a rise of 20%. 

Source: SwyftX.com (Only applies to Bitcoin)

If we take a more narrow view to focus on specific coins, over the past 10 years, Bitcoin’s (BTC) price has seen a rise of 6 out of 10 during this period. Other popular cryptocurrencies, like Ethereum (ETH) and Cardano (ADA) , have similarly seen this as a joyous period. 

However, it’s important to note that the Halloween Effect isn’t always guaranteed, as evident in 2021 and 2022, when the same period saw a general market decline of 13%. Therefore, while it’s certainly an exciting strategy and one with a provable reputation, relying on it wholeheartedly is never guaranteed to succeed in the long run. 

Traditional Stocks 

To give us an idea of whether the Halloween Effect could persist for crypto in the long term, our best reference is to look at other asset classes, particularly traditional stock markets. 

Between 1970 and 2017, S&P 500 stock returns almost always increased between Halloween and May, with a similar pattern occurring for the Nasdaq 100 over the last decade. 

If the effect has lasted this long in other financial sectors, it’s doubtful that it’s more of a one-time occurrence than a genuine trend in the cryptocurrency market that needs to be acknowledged. 

What Causes the Effect?

This is where things start to get a little spooky. 

Despite being analyzed for many years by many business analysts and scholars, nobody has identified one definitive reason why this event occurs. This is why it has become mystified as a mysterious and rather unusual occurrence that just so happens to correlate with Halloween, the one time of the year when superstition is rife. 

However, some suggestions have still been presented as to why the Halloween Effect occurs. 

Winter News Coverage

Source: CNBC.com

Some theorize that since there tends to be more news coverage in the winter months when people are inside rather than in the summer, this could have an underlying impact on crypto prices.

It’s worth remembering that headlines can have drastic effects on the market, just look at the surge in BTC value when Donald Trump showed up at the 2024 Bitcoin Conference, or Elon Musk’s Tweets about Dogecoin (DOGE) .

Additionally, crucial data like interest rates tend to be released at the end of the year, which can bolster prices depending on whether they’re favorable or not. 

More Liquidity 

Others have suggested that the crypto market gains more liquidity during the winter as more people have spare money to participate after their summer holidays and getaways are finished.

A market with high liquidity means that people are able to buy and sell assets easily due to the large investor participation at that time.

As a result, it tends to keep token prices more stable, negating the volatility that crypto is usually known for. However, while this may not exactly raise prices, it could present the illusion that there has been a surge in value if the prices become stable again after a previous low point. 

Efficient Market Hypothesis

The Efficient Market Hypothesis states that Information relevant to asset and stock prices is readily available, and therefore, assets are always trading at their current fair market value.

Crypto is classed as a ‘Weak’ form of EMH, which means that historical information is reflected through the prices of tokens. In other words, the past performance of this Halloween strategy is said to ensure that prices gradually rise during the period since there is information to make that happen. 

Satoshi’s Ghost Myth 

Source: Dailycoin.com

Just to be clear, this is more of a superstition than a legitimate market prediction, though it is still a theory that has gained significant weight. 

Satoshi Nakamoto , the founder of Bitcoin, has had his identity shrouded in mystery ever since he released the BTC whitepaper in 2008. However, though he may not be involved with crypto anymore, as he hasn’t been heard of for over 10 years, some believe that the grandfather of crypto is still influencing the market from behind the scenes as a ‘ghost’.

In May 2020, for example, it was revealed that a large sum of Bitcoin traced back to 2009, when it was founded, had been moved from one address to another. This caused some people to theorize that this was the ‘ghost’ of Satoshi, whether in the literal sense or just as a whale subtly moving Bitcoin around without revealing his identity or motives. 

If this were the case, Satoshi could be buying up large amounts of Bitcoin around Halloween to decrease the supply and, in turn, raise value. Again, though, this is more akin to those age-old ghost stories that are designed to get people’s minds racing, but just like those tales, there’s no telling whether it’s true or not. 

Criticisms of the Halloween Effect 

Though some have attempted to explain the Halloween effect, alongside many investors who look forward to the period, there have also been several staunch critics . Here are their main arguments for why the Halloween Effect isn’t as promising as some might initially believe:

  • Makes Investors Less Opportunistic: Crypto is known for its unpredictability. Tokens can rise and fall in weeks, days, or even hours. Being able to jump on these opportunities when they arise is an appealing prospect to many investors. However, sticking too closely to the Halloween Effect timing strategy could cause people to miss out on these opportunities that could otherwise diversify an investment portfolio.
  • Ignores Wider Context: There’s no telling what sorts of global events could occur between the end of October and May. Whether it be global conflicts, elections, or even arrests, these sorts of events can result in a more damaging period for crypto rather than a promising one.
  • May Sell-Off Unpredictability: Numerous stats, including one report provided by Fidelity, show certain tokens rising in value after May ends, making the May sell-off pointless in some cases. 

On the Flipside

  • The Santa Claus Rally, where crypto prices tend to spike between Xmas and New Year, has also garnered a lot of attention. 
  • Though it has seen mixed results, many investors will still decide to open and close during this period instead for quicker results in the short-term. 

Why This Matters

As a crypto investor, it’s always important to have a finger on the market’s pulse.

Considering how much buzz the Halloween effect has on the crypto world, learning how it tends to impact prices is never a bad thing. Discovering its mysterious origins and inner workings can also make for a great story when roasting marshmallows with friends around the campfire. 

FAQs

What is the January Effect?

The January Effect is the belief that crypto, bonds, equities, and other assets experience a spike in value during the first month of the new year. 

Who Coined the Term ‘Halloween Effect’?

The original term for the strategy was ‘Halloween Indicator’ by Sven Bouman and Ben Jacobsen in their 2002 book ‘The Halloween Indicator: Sell in May and Go Away’. The book takes a deeper look into the origins of the trading strategy in Victorian England.

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