Bitcoin: Do Volatile, Bullish Sessions Lead To Further Gains?

 | Jun 27, 2019 06:20AM ET

Bitcoin has been grabbing the limelight once more as it breaks through key levels like a knife through butter. Having travelled 20% yesterday alone, we've analysed how the crypto currency has performed on previous occasions following such levels of volatility.

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BTC Daily Chart

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It’s no secret the Bitcoin (BTC) and other crypto currencies are highly volatile vehicles, which can post eye watering numbers when compared with other instruments. For example, BTC has rallied over 80% since the June low just three ago, and even this pales in comparison to 326% appreciation since December’s low to yesterday’s high. Just yesterday, Bitcoin’s daily range exceeded 20%, a threshold which could be the difference between a bull or a bear market to other assets. With that in mind, we’ll take a closer look at how Bitcoin has behaved under such volatile conditions.

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Using data going since July 2014:

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  • There have been 38 sessions where Bitcoin’s daily range was >=20%.
  • Of these 38 days, 36.9% were bullish (63.2% were bearish)
  • From this sample, the largest bullish close was 22.4% (largest bearish day was -24.5%)

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From this we see that:

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  • Nearly 2/3 of daily ranges >=20% were bearish
  • The most bullish day from the sample was larger than the most bearish
  • Such levels of single-day volatility have been favourable to the bear-camp.

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However, as the trend is undeniably bullish and yesterday closed nearly 12% higher, we’d like to drill down into the data to see Bitcoins forward returns following bullish days with a range >=20%. For clarity, forward returns measure the performance of a market following a particular event, using historical data.

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T+1: % return next day
T+1-2: % Returns over the next 2 days

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Following bullish days with a high-low range >= 20%:

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  • On average, the following day produced negative returns of -1.14%, and closed lower 61.5% of the time
  • After two days, bitcoin averaged -0.93% return and closed lower 61.5% of the time
  • On average, positive returns were seen with hold times between 3 and 10 days after the event
  • Typically, the average return increases over time towards a 10-day hold after the event
  • Average returns peaked after 10-days of holding
  • Media (typical returns) peak around 8 days later (just over a week)

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It’s worth noting at this stage that there have only been 13 days that fit our criteria. Statistically speaking, we’d want at least 30 occurrences at a minimum to be confident the results were valid. However, if we drop the threshold to 15% high-low range, the sample size becomes 33 and similar patterns emerge.

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Following bullish days with a high-low range >= 15%:

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  • On average, all holding periods produced a positive return
  • 10-days holding period produced the highest, average return
  • Median (typical) average return peaks at 8 days

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And, to drill down a little further, we look at average returns on a day by day basis.

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Following bullish days with a high-low range >= 20%:

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  • The highest % return occurred on day 6 (T+6)
  • The 2nd highest % return occurred on day 3 (T+3)
  • The 3rd day closed higher 84.6% of the time
  • The 6th day closed higher 69.2% of the time

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So from this data-set, day 3 and 6 after the event were the most profitable. And if we re-run the test using a >=15% threshold (to increase the sample to 33) then the results are similar, only the returns are smaller.

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Key Takeaway:

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Overall, it suggests that on average, bullish sessions with a range >=15% or >=20% lead to a positive return on day 3 or 6. Furthermore, holding between days 3 to 10 yields an increasing positive return.

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Of course, past results are not indicative of the future – but there are some interesting numbers here none the less.

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