Bitcoin was trading for well over $60,000 in April, after making an astounding run from $11,000 in October. But after a tough first half of May, it’s been at about $33,000 as the crypto buzz died down.
The cycles of bitcoin’s (BTC) popularity are a hallmark of the digital asset, so far at least, and despite its novelty, it’s old enough (12 years) for some patterns to have emerged.
Though there’s no guarantee that what comes next won’t be different, hedge fund veteran and co-founder of DataTrek, Nicholas Colas, pointed out an interesting pattern with bitcoin different from what we usually see in stocks.
Bitcoin is best bought when it’s “boring” and best sold when it’s “moving sharply higher and we feel like geniuses for owning/recommending it,” wrote Colas.
“It is the classic ‘instead of yellin’, you should be sellin’’ trade,” he added.
Colas recognizes the HODL crowd of believers and the fact that, for them, it’s been good (so far). But that “even those hardy souls, however, might benefit from considering more auspicious times to lighten up or add to positions.”
Using a continuum between “boring” and “spicy,” Colas looked at the standard deviation of daily bitcoin prices over the past 100 days and found that buying when volatility is high didn’t usually work out well. Buying when volatility was low, on the other hand, yielded better future returns. With the exception of four instances after huge rallies, buying when volatility is low and selling when it’s high has worked out well.
“It’s worth noting this pattern is exactly the opposite of what we see in equities,” Colas added. “Also, as a stock’s market cap increases it usually sees less volatility. That’s not the case with [bitcoin].”
Importantly, this analysis is more technical as well as psychological in how people react to the asset, and has nothing to do with fundamentals or investment theses. While this takeaway is useful, it has some obvious limitations: It can’t tell you how long to hold necessarily after you buy or what an average return might be. Instead, it’s more of a directional indicator — if you believe, as Colas does, that this pattern is common in digital currencies, you might heed his advice and sell when the volatility starts to creep up again.
So what does that mean right now for bitcoin’s volatility should the pattern Colas observes continue? The trailing 100-day volatility is still greater than 3.0%, which means it’s not quite boring enough to “create a sensible entry point for a trade or a longer term investment that doesn’t yield stomach-churning near term volatility.”
“The good news from the historical record,” Colas continued, “is that this day will come.”
Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.
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