Messari Investment Observation: Crypto also has a circadian rhythm
Article translation: Block unicorn
Article translation: Block unicorn
An interesting anomaly in traditional markets is the discrepancy between returns during trading sessions and returns accumulated overnight. Investors who buy and hold the SPY ETF (tracking the S&P 500 Index) will earn more than 7 times their investment since it began in 1993. However, if they only hold at market open time (between US open and US close) for the same period, they will not be rewarded - all performance of the SPY ETF is generated overnight, i.e. the previous day's close and between market opening prices.
A key difference between cryptocurrencies and traditional markets is the 24/7 nature of digital assets — unlike stocks, trading is not bound by the dates and times when exchanges are open. But even though tokens are global in nature, market participants are still subject to time zone differences and sleep needs (although the average cryptocurrency trader probably gets less sleep than most!). When breaking down the trading day into traditional market opening hours (New York, London, Hong Kong), it is clear that the rewards of holding cryptocurrencies do not increase linearly over time.
If investors had held ETH since the beginning of 2020, their initial investment would have increased by more than 26 times (by September 12, 2021). However, if the same investor only held ETH during Hong Kong market hours, they would instead realize a negative return. Conversely, if they hold ETH during New York or London market hours, they will still get a large percentage return.
We have seen similar behavior in most of the largest coins during this period. With a few exceptions, Asian trading hours were generally markedly weaker, with negative cumulative returns for BTC, ETH, and LTC. In contrast, BNB appears to exhibit the opposite pattern, with extremely low returns during U.S. market hours, while generating most of its gains when markets open in Hong Kong. Interestingly, XRP’s returns have accumulated during the US and Asian trading hours, but were much weaker during the London session. This is despite differences in the levels of returns experienced by these assets across different trading sessions.
What Drives Cryptocurrency Returns?
Traditional asset pricing theory holds that return on assets is the return on risk taking. Proxying volatility for risk, most of these cryptocurrencies experienced slightly lower volatility during Hong Kong market hours during this period (10% to 15% lower using 1-minute data), suggesting a smaller risk premium. But that wasn't enough to explain the stark difference in performance, especially when realized gains were negative during the Asian session.
The results look more nuanced when considering tail risk (deviation in 1-minute returns). All cryptocurrencies show significant negative skewness (i.e., their largest swings are to the downside) during US market hours, which is not the case during Asian market hours, where returns are positively skewed for all but XRP incline. Compensation for additional tail risk during New York trading hours may therefore be a contributor to the additional returns during US trading hours. Skewness, however, does not account for the London session, which in this particular sample performed roughly on par (or outperformed) the US, but with no tail risk - London session returns were actually positive most of the time Skew these assets since January 2020.
in conclusion
in conclusion
The variance in the returns of the largest cryptocurrencies at different times of the day is an anomaly that cannot be fully explained by the main economic arguments in favor of these assets as stores of value. The most likely driver is a nuance in the intraday market microstructure. Whether this anomaly can be exploited for profit in the future depends on the extent to which the drivers persist. For example, if selling pressure from Asian miners is driving this divergence, will recent changes in the geographic distribution of mining operations disrupt this pattern? How will changes in mining incentives (such as EIP-1559) and changing regulation for institutional investors change the landscape? Crypto's circadian rhythm will be interesting to monitor going forward, as it may reveal changes in supply and demand dynamics.
