Like every year, October 31 is Halloween night. If the costumes are still wisely stored in the cupboards and the sweets are waiting warm, some still consider the date of October 31 as a turning point in the markets at risk. This is called the Halloween effect. Together, we will come back to what it really represents.
What is the Halloween effect?
The Halloween effect is to say that there would be an uptrend in the risky markets from the end of October until the beginning of May. In other words, these 6 months of the year would be more profitable for investors who bet on bullish markets.
The Halloween effect was first theorized in 2002 by economists Ben Jacobsen and Sven Bouman. By studying data from 37 countries and over a period of nearly 30 years (1970 – 1998), the two economists have succeeded in highlighting this outperformance of equity markets between November and April compared to the other 6 months of the year. ‘year. If the observation has been confirmed by other studies, the phenomenon remains largely unexplained. This is found both in developed economies, but also in emerging economies.
If the effect was only highlighted in 2002, it seems very real for more than 100 years. The explanation most often put forward to explain the Halloween effect comes from the United Kingdom. In the 1900s, the most established families of the Kingdom tended to desert the big cities before summer to find them again at the end of autumn. The explanation is that they closed their positions before these long vacation periods to reopen them on their return. This strategy is also known as “sell in May and go away” (sell in May and leave).
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Concrete applications in the crypto market?
If the Halloween effect initially deals with equity markets, the obvious correlation between equities and digital assets leads us to wonder about the recurrence of the effect on cryptocurrencies. And on several occasions, the Halloween effect could be identified in the digital asset market. From 2015, when digital assets are experiencing a bear market, the date of October 31 will mark the trend reversal. Between Halloween and the end of October, the crypto market saw its marketcap climb by more than 40%.
Rebelote the following year when the bitcoin price experienced a rally of more than 100% between the end of October 2016 and the beginning of May 2017. During the explosion of the crypto market at the end of 2017, Bitcoin and the entire crypto market had experienced the near Halloween rise. Despite the sharp drop at the start of 2018, the rise between October 2017 and May 2018 was more than 50% for Bitcoin. But the mother of cryptocurrencies is obviously not the only one to have benefited from the increases between the end of October and the beginning of May. This was also the case for Cardano or Ethereum Many times.
Should you buy digital assets before Halloween?
Historical statistics tend to say yes. But if examples of increases between November and April are legion, the year 2022 offered a perfect counter-example to the Halloween effect. Indeed, if the crypto market reached its ATH in early November, coming to touch the threshold of $3 trillion marketcap, the next 6 months were cataclysmic. The following graph shows the evolution of the Bitcoin price between November 1, 2021 and April 30, 2022:
As it moved above $61,000, the asset saw a sharp drop to $38,000 at the end of April. Since then, Bitcoin has continued its fall. As of this writing, the asset is trading against less than $21,000.
The hypothesis of a “Halloween effect” which would work every year and see risky markets propelled upwards therefore cannot work. If this were the case, the supposedly rational economic agents would all seek to take advantage of this effect. Which would have the effect of canceling it. Especially since the Halloween effect can today be largely called into question by the ease of connection anywhere in the world and the emergence of online platforms such as eToro. Elements that allow traders around the world to maintain their positions throughout the year.
Either way, Bitcoin near $20,000 is still seen by many as a bargain from a long-term perspective.
Read also: Bitcoin, around 30,000 dollars in November?