Proof of Altseason¶
Altseason is a statistically significant and predictably recurring seasonal pattern in cryptocurrency markets, where altcoins -- proxied by Ethereum -- outperform Bitcoin from January through May and underperform from June through December. Published in 2021, this research applies established equity market seasonality methodology to cryptocurrency, demonstrating that the well-documented "Sell in May and Go Away" effect extends to digital assets with amplified magnitude.
Seasonality in Financial Markets¶
Seasonality is an annually recurring event that is often predictable, a subset of the broader group of market anomalies associated with behavioral finance. The January Effect -- an increase in stock prices during January -- is among the most cited examples. Explanations range from tax-loss harvesting to window dressing by fund managers to investor psychology influenced by weather and calendar position. Research examining newspaper sentiment from 1986 to 2010 found investor psychology skewed toward optimism in the first half of the calendar year and pessimism in the latter. Further, financial market seasonality appears everywhere and all the time, not limited to particular markets or years.
In U.S. and European equity markets, the seasonal effect has taken on monikers including "Sell in May and Go Away" and "The Halloween Indicator." Based on 90 years of equity returns, this anomaly accounts for 30 to 50% of total market return while exhibiting below-average variance. Fund managers tend to start the year buying small, risky stocks to beat benchmarks, then adjust toward less risky, visible stocks to lock in returns -- a pattern that reinforces seasonal behavior.
Seasonality in Bitcoin¶
Bitcoin exhibits seasonality consistent with that found in equities. The strength and consistency of Bitcoin's October performance has spawned the phrase "Uptober" among investors. Bitcoin behaves like and is treated as a risky asset: while it has offered 15 times greater returns than the S&P 500, it has come with only 9 times greater risk, producing a Sharpe ratio of 1.8 compared to 1.1 for U.S. equities.
On a seasonal basis, Bitcoin behaves almost exactly like a 15-times leveraged S&P 500 fund. The average monthly return patterns for Bitcoin and a hypothetical 15x S&P 500 are a 98% statistical match. The correlation between Bitcoin and equity seasonality is approximately 70%.
There has been speculation that Chinese mining operations create seasonal price patterns through weather-dependent energy costs, but because Bitcoin's seasonally adjusted price history is so highly correlated to that of U.S. equities, mining geography is unlikely the primary driver. After China banned mining in 2021, the seasonal pattern persisted, strengthening the assertion that investor behavior -- not supply-side factors -- drives Bitcoin's price.
Seasonality in Altcoins¶
Ethereum, the largest altcoin, serves as a proxy for the broader altcoin market. Ethereum shows high correlation to most altcoins, and when Bitcoin, Ethereum, and stablecoins are excluded, the next seven largest coins represent over 20% of the remaining market capitalization of nearly 10,000 tokens.
Monthly return data from 2015 through 2021 reveals an apparent seasonal effect in Ethereum from December through May. This seasonality is more pronounced in the relative return of Ethereum to Bitcoin, where it occurs from January through May -- literally and precisely the January/Sell in May effect described by decades of equity research.
Statistical testing using the Bouman [2002] methodology confirms the pattern at the 95% confidence level for both absolute Ethereum returns and Ethereum returns relative to Bitcoin.
Mechanics of the Seasonal Effect¶
The effect is quantified through segmented up-market and down-market capture ratios. During altseason (January through May), Ethereum captures 204% of Bitcoin's upside and only 7% of its downside. During the remainder of the year, Ethereum captures only 71% of Bitcoin's gains while suffering 262% of its losses.
The nearly 2:1 relationship in both seasons is not a coincidence. It has roots in Metcalfe's Law. Because altcoins represent a smaller share of the market, flows between networks produce disproportionate impacts. If 20 users leave a 100-user network and join a 60-user network, network effects dictate that the percentage gain in the smaller network is approximately twice the loss in the larger one. This asymmetry explains both the amplified seasonal returns and the higher volatility of altcoins relative to Bitcoin.
As altcoins have grown relative to Bitcoin over time, the relative impact has lessened, consistent with diminishing marginal effects as the smaller network becomes proportionally larger.
A Back-Tested Rotation Strategy¶
Four hypothetical portfolios were constructed from August 2015 through September 2021: buy-and-hold Ethereum, buy-and-hold Bitcoin, an Ethereum-plus-cash seasonal rotation, and an Ethereum-plus-Bitcoin seasonal rotation. The ETH+BTC portfolio -- holding Ethereum from January through May and Bitcoin otherwise -- outperformed buy-and-hold Ethereum by 80 times and buy-and-hold Bitcoin by over 500 times over the full period. Even over the most recent three years, it outperformed buy-and-hold Bitcoin by 3 times and buy-and-hold Ethereum by 2 times. The ETH+BTC portfolio achieved a Sharpe ratio of 4.19 compared to 1.64 for Bitcoin and 1.42 for Ethereum.
Why Seasonality Persists¶
Unlike other mispricing anomalies, seasonal effects in financial markets are likely a combination of human psychology and recurring temporal conditions. The workings of the human brain are not easily altered, and the earth's orbit around the sun is fixed. Seasonal effects are inherent in the way societies operate and cannot be arbitraged away. Even rational investors should choose to capture seasonal effects or risk trailing their peers -- behavior that would only reinforce and perpetuate the pattern.