Educational Byte: The Halloween Effect in Crypto and Stocks

Curiously enough, Halloween could be a mysterious time, even in the world of finances. Have you ever heard of the bullish "Halloween effect" in stocks and cryptocurrencies? It's a fascinating phenomenon that suggests that after every Halloween (October 31), these markets tend to perform their best until the following May. Some even like to sum it up with the catchy phrase, "Sell in May and Go Away," until Halloween rolls around again. Sounds like a spooky mystery, right? Well, let's dive a bit into this phenomenon.

The Halloween strategy is all about timing the market, which goes against the traditional "buy-and-hold" strategy. It encourages investors to be fully invested in stocks from November through April and then stay out of stocks from May through October. It might sound like a bit of a ghost story, but there's some intriguing data to back it up.

An intriguing story

The origins of this strategy can be traced back to the United Kingdom, where the wealthy class used to leave the bustling city of London for their country estates during the summer. They often neglected their investment portfolios during this time and only returned to the markets in September. The idea of abandoning stocks in May became quite popular, giving rise to the saying, "Sell in May, go away, come again, St. Leger Day."

In more recent times, researchers Sven Bouman and Ben Jacobsen examined stock performance from November to April and coined it the "Halloween Indicator." According to their observations, investors who follow this strategy, fully investing for one six-month period and staying out of the market for the other six months, could potentially enjoy the better part of an annual return with only half the exposure of year-round investors.

So, does it really work? Well, historical data suggests that the Halloween strategy has been quite successful over the past half-century. In fact, during a five-year timeframe, the strategy of selling in May beat the market over 80% of the time. And when applied in over ten years, it was successful more than 90% of the time. The numbers seem to indicate that the months from November to April often yield stronger capital gains compared to the rest of the year.

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\But here's where it gets mysterious: no one has been able to pinpoint a single, definitive reason for this anomaly. Some speculate that market liquidity is influenced by investment professionals' summer vacations, while others believe that investor aversion to risk during the summer plays a role in the discrepancy in seasonal returns. However, it's not entirely clear whether these factors are the true cause.

Halloween effect in crypto

This pattern has also been observed in the past for Bitcoin and other cryptocurrencies, but it's not a strict rule. It’s only a matter of checking the total cryptocurrency market capitalization in recent years to discover it (on CMC, in our case). From Halloween in 2015 to May 2016, the whole market increased by over 55%. In the same period between 2016 and 2017, the market cap increased by over 177%.

Then, from Halloween 2017 to May 2018, the market increased again by over 127%. It’s not infallible, though. Between 2018 (a bearish year) and 2019, the market decreased by 13%, and between 2019 and 2020 also declined by 1.5% in the same period. The Halloween effect came back in full force between 2020 and 2021, with an increase of over 457%. But the market decreased again by 34% between November 2021 and April 2022.

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*The last “Halloween period” (between November 2022 and April 2023) showed modest gains of 20% for the whole market. However, we can’t say thatall coins increased their price in this period (or before). This may be considered a good time to invest, but every project should be researched thoroughly on its own.

We must remember that cryptocurrency markets are highly volatile and influenced by various factors, and past performance doesn't guarantee future results. So, while the Halloween effect might be an interesting trend, it's always wise to approach investment decisions with caution and a long-term perspective, especially in such a rapidly changing market. In the meantime, Obyte can offer you a safe wallet to save and invest in the long term with several cryptocurrencies, thanks to the Counterstake Bridge.

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