22 Feb 2022

Push and pull? Bitcoin’s monthly cyclicality

Since the beginning of 2021, bitcoin has seen remarkable differences in performance in the first half of the month versus the second half.
Source: Tradingview (Coinbase)
The bitcoin price has behaved in a very interesting pattern over the last year, with more or less all BTC gains since 2021 occurring in the first half of the month, as highlighted in the chart. The chart illustrates bitcoin’s returns from the date of last months CME future expiry to mid-month* and bitcoin’s returns from mid-month to the next expiry date. Since January 2021, 8 out of 14 months have seen positive mid-month returns, whereas only 3 months saw positive mid-month to end-month returns. A trader using $100 to buy bitcoin at expiry and selling mid-month since Dec 24th, 2020, would’ve seen her funds grow to $350 today, whereas a trader using the opposite strategy would see her funds decline to $47 today. This is particularly remarkable when you account for bitcoin appreciating by 87% in the period examined.
We cannot give any firm explanations as to why this is happening, although several effects could be playing out. In the Q1 2021 bull market, the BTC price tended to revert to its monthly VWAP price, coinciding nearly with the max pain price of monthly options.
Source: Laevitas
The futures-based ETFs possible impact on bitcoin’s cyclicality
Could futures-based ETFs enhance the monthly cyclicality seen in bitcoin? The first four months since the launch of these ETFs suggest that inflows in the ETFs are muted in the weeks where the ETFs roll futures.
Source: Proshares
The futures-based bitcoin ETFs are currently in the process of rolling over its front-month exposure for the fifth time since launching in October. These ETFs have a relatively short-lived history, but so far into their existence, inflows have shown signs of being concentrated to the days and weeks following the rolling weeks. In contrast, inflows have been muted during the rolling weeks. This pattern makes sense. An investor who seeks to allocate into the fund could be better off by waiting to allocate until the futures have been rolled, thus avoiding the rolling costs. We saw neutral flows into BITO during the rolling weeks of the Oct-Nov, Nov-Dec, and Jan-Feb rolls, while inflows accelerated in the weeks that followed. The Dec-Jan roll is the only example of flows not accelerating in the weeks that followed to this date. The aforementioned fund flow effect might have spillover effects on the bitcoin price. Market makers hedge across markets, and growing BITO inflows directly impact buying pressure on CME, in turn impacting the spot market. If the trend of inflows post-roll remains, bitcoin’s cyclical pattern might be sticky. During the rolling week, when we tend to see no noteworthy inflows, BITO sells front-month contracts and buys the next-month contract and two-month contract. This process could cause a minuscule net exposure reduction caused by a futures contango, benefitting the house and arbitrageurs. This contango effect will likely have a very minuscule impact on the spot market. The key observation from BITO’s fund is the possible spillover effects caused by inflows following rolls, which could enhance the cyclical dynamics of bitcoin.
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