Bitwise: Why is the crypto market hard to escape the "September Effect"?

Author: Matt Hougan, Chief Investment Officer of Bitwise

Compiled by: Luffy, Foresight News

September is the cruelest month. Since its inception in 2010, Bitcoin has averaged a decline of 4.5% in September. September is the worst-performing month for Bitcoin to date and is one of only two months with an average return that is negative.

Average monthly returns of Bitcoin from 2010 to 2024; Source: Bitwise Asset Management, Glassnode, and ETC Group; Data range from August 2010 to September 2024.

There are no signs of improvement. According to an analysis by NYDIG, Bitcoin has declined in 9 out of the 13 recorded Septembers. September 2011 was the worst month for Bitcoin in history, with a drop of 41.2%. As of this month, Bitcoin has already fallen 7% as of Sunday.

As the Green Day song goes, "Wake me up when September ends."

What Drives the "September Effect"?

There are many discussions about the reasons behind the September effect, and there is currently no particularly convincing theory. Here are three main theories briefly outlined:

1. September is a Bad Month for All Risk Assets

Bitcoin is not the only asset affected by the back-to-school season. Since 1929, September has been the only month where the stock market has seen more declines than gains. This phenomenon is particularly evident in the Nasdaq 100 index.

Economists have tried to attribute this to various factors, such as increased volatility following a summer economic slowdown and mutual funds suffering losses at the end of the fiscal year. However, no one can pinpoint the true cause.

Regardless of the reason, this phenomenon has occurred again: as of Friday, September 6, the Nasdaq 100 index has fallen nearly 6% this month.

Average monthly gains of the Nasdaq 100 index; Source: ChartoftheDay.com; Data range from January 1985 to December 2023.

2. SEC Enforcement Season Puts Pressure on Cryptocurrencies

The SEC's office hours run from October of one year to September of the next. Historically, you will find that September has seen many enforcement actions as lawyers scramble to complete their annual tasks. Nowadays, the SEC enforcement season is heating up: this month, we have already seen the SEC reach a settlement with crypto fund provider Galois Capital, as well as a Wells notice against the NFT platform OpenSea. Many predict that by the end of the month, lawsuits and settlements against crypto entities will intensify. I am not surprised; I have been hearing rumors of larger-scale enforcement actions since early summer, and we have long warned about the dangers of the SEC enforcement season.

3. Reflexivity

The best explanation for the September effect may be reflexivity. People now expect September to be bad, and the results indeed reflect that. This is often the case: expectations drive the market.

In contrast, Bitcoin investors have historically favored October, which is referred to as "Uptober." Bitcoin has averaged a 30% increase in October, which may fuel investor enthusiasm. Historically, October and November are among the best-performing months for cryptocurrencies.

Outlook for the Crypto Market

Like most people, I am unsure how to interpret the "September effect." I am unclear about how much impact the above factors have and what other undiscovered forces may be at play. Regardless, it is affecting the current psychology of the crypto market.

What I do know is that, aside from seasonal factors, it is crucial to focus on the specific conditions of the current market. Thus, I began to understand the reasons behind the weakness of cryptocurrencies this September.

The market hates uncertainty, and there is a lot of uncertainty in the current market.

The U.S. presidential election will have a significant impact on cryptocurrencies, and the outcome is currently too close to call. I believe that until we have a clearer understanding of future leadership and policies, the market will struggle to find solid ground.

The timing and extent of Federal Reserve interest rate cuts are hotly debated. While there is a general consensus that easing monetary policy is on the horizon, investors are recalibrating their bets: the likelihood of a 50 basis point cut in September has decreased, while the likelihood of a cut exceeding 125 basis points in December has increased.

ETF fund flows are mixed. Although inflows into Bitcoin and Ethereum ETFs have decreased (the U.S. Bitcoin ETF has just experienced its longest net outflow period since its launch in January), if you look closely, you will find that investment advisors are adopting Bitcoin ETFs at a faster rate than any new ETF in history.

My prediction is that as this uncertainty begins to dissipate in October and November, we will see a significant rebound in cryptocurrencies. This aligns with historical trends, which may be coincidental or not. Regardless, be prepared.