why do you win when wall street sleeps?

Bloomberg — Have you ever asked yourself this question? When Wall Street sleeps or is not operational, Bitcoin usually kicks into high gear. You can party all night and, in the process, post stronger profits than when US markets are open.

A hypothetical strategy that buys the currency at the close of the stock market – 4:00 p.m. in New York – and sells it at the opening of the next day – 9:30 a.m. – yields a profit of approximately 260% from early 2020, according to Bespoke Investment Group. On the contrary, buying it at the opening of the US market and selling it at the close represents an advance of 3.6%. The coin even tends to rise on weekends, according to the company, when stock investors are lounging or having a barbecue or whatever other weekend activities they’re fond of.

However, no one seems to agree on why this is happening.

Theories abound, with some claiming that investors have no choice – thanks to the 24/7 nature of the market – but to turn to cryptocurrencies while stocks are closed. Others suggest that crypto traders are forced to process a lot of information overnight, leading to large price swings.

Bitcoin fell as much as 5.3% to $26,876 on Sunday, the lowest since the Terra blockchain crash in early May. It is down 1.7% to $27,891 at 12:52 p.m. in New York.

Here are some opinions on the reason for this phenomenon:

The nature of a 24/7 market

The fact that cryptocurrencies are traded 24/7 makes Bitcoin by default the most closely watched and traded asset when traditional markets are closed, and that is one of the main reasons for the phenomenon. overnight, says Mike McGlone of Bloomberg Intelligence. “It’s the smoothest 24/7 global trading vehicle in history, which means it’s also a leading indicator to the downside,” he says.

geographical differences

In the US and elsewhere, riskier assets have sold off this year, as the Federal Reserve and other central banks have instituted policies to combat high inflation. But that may not be the case everywhere, and risk-taking attitudes may still be in play in Asia, for example, says Noelle Acheson, head of market insights at Genesis Global Trading.

In 2015 and 2016, China had been a focal point for Bitcoin trading — it’s where mining took off and most of the trading volume originated, he said. “There are different cultural attitudes toward riskier investments.”

Also, some investors might be more attracted to the use of leverage, and international centers are sometimes more permissive in that regard. The original cryptocurrency exchanges used to offer 125x leverage, Acheson said, although, in the US, regulators have tried to restrict that access. “So they’re much more used to high leverage, it’s much more than they expect,” he said.

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a longer period of time

Bitcoin’s correlation with equities could be another factor at play, something analysts have been pointing to all year as both cryptocurrencies and equities have sold off. Both stocks and digital assets are considered riskier, so the two have moved hand in hand, says Jake Gordon of Bespoke Investment Group.

However, the correlation with stocks may not explain why the trend of outperformance after work hours also existed when the market was rising in the last two years, he said. Therefore, another explanation is that the post-close strategy covers a longer timeframe, “meaning there is a potential for more news/catalysts to consider.”

looking at the charts

As of 2021, due to China’s crackdown on cryptocurrencies, trading volumes and flows have tended to peak around 9:30 a.m. Eastern Time, according to Chiente Hsu, co-founder and director overview of ALEX, a DeFi platform. “So trading volume is highly correlated to US stock market trading hours,” he said in an interview. Hsu, who used to work at Morgan Stanley, cited research showing that the overnight trend of buying at the close and selling at the open was also prevalent in the stock market before the pandemic.

But why can it be so? Hsu says information flows build up overnight, though that’s most prevalent during bull markets. And bear markets? “In a downtrend market, it shouldn’t work, especially in very volatile and range-bound markets,” he says, adding that he would like to see more research on these types of topics, as well as the influence of transaction costs. .

Correlations

Vetle Lunde, an analyst at Arcane Research, says he expected US trading hours to be the biggest contributor to Bitcoin selling in recent months, but did not expect it to be the only factor. “On the other hand, it confirms what we have seen elsewhere in the market,” Lunde said, citing the currency’s strong correlation with equities this year.

“We saw in mid-2020 and early 2021 that US trading hours were the key hours for the initial breakout during the early bull market. That period was characterized as a period of huge institutional flows into Bitcoin,” Lunde wrote in a message.

“Now, most of the institutional market has focused on risk reduction, with the macroeconomic environment related to inflation and interest rate hikes being the key component behind risk reduction. This has certainly had a severe impact on Bitcoin and is probably the main cause behind the continued very strong selling pressure during US trading hours.”

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