Bitcoin traded for well over $ 60,000 in April after hitting a staggering $ 11,000 run in October. But after a tough first half of May, it was around $ 33,000 when the crypto buzz subsided.
The cycles of bitcoins (BTC).
While there’s no guarantee that what’s next won’t be any different, hedge fund veteran and DataTrek co-founder Nicholas Colas pointed out an interesting pattern in Bitcoin that is different from what we normally see see at stocks.
Bitcoin is best bought when it is “boring” and best sold when it “rises very sharply and we feel like geniuses owning / recommending it,” wrote Colas.
“It’s the classic ‘instead of yelling’ you should sell trade,” he added.
Colas acknowledges the HODL believers and the fact that it has been good for them (so far). But that “even these tenacious souls could benefit from considering more auspicious times to lighten or broaden their positions.”
Using a continuum between “boring” and “sharp”, Colas examined the standard deviation of daily Bitcoin prices over the past 100 days and found that buying usually did not work well when volatility was high. On the other hand, low volatility purchases produced better future returns. With the exception of four cases after major rallies, buying in low volatility and selling in high volatility has worked well.
“It’s worth noting that this pattern is exactly the opposite of what we see in stocks,” added Colas. “Also, the greater the market capitalization, the lower the volatility of a stock. That is not the case with [bitcoin]. “
Importantly, this analysis is both technical and psychological in terms of people’s reaction to the asset and has nothing to do with fundamentals or investment theses. While this takeaway is useful, it has some obvious limitations: it can’t tell you how long it is imperative to hold after your purchase, or what the average return could be. Instead, it’s more of a directional indicator – if, like Colas, you believe this pattern is common in digital currencies, you could take his advice and sell if volatility picks up again.
What does this mean for Bitcoin’s volatility now, should the pattern observed by Colas continue? The 100-day trailing volatility is still above 3.0%, which means that “creating a reasonable entry point for a trade or longer-term investment that won’t cause stomach twists in the near future” isn’t boring enough.
“The good news from the historical record,” Colas continued, “is that that day is coming.”