The Election Year Effect in Bitcoin by Cane Island Digital Research

The Election Year Effect in Bitcoin

Executive Summary

 Bitcoin shows much greater volatility in nonelection years (average of 25.4%) compared to presidential (14.3%) and midterm election years (5.0%). This elevated volatility in non-election years indicates increased risk driven by global uncertainties, making Bitcoin more susceptible to large price swings.

 Bitcoin’s October returns in non-election years outperform those in election years by about 25%. This trend highlights potential for higher returns in non-election years, though it comes with added volatility as Bitcoin responds to broader market forces beyond U.S. politics.

 Bitcoin’s performance in October strongly influences November returns, often exhibiting a momentum effect. A strong October typically precedes a strong November, and vice versa, suggesting that investors might anticipate and capitalize on continued momentum across these months. This seasonal pattern underscores Bitcoin’s unique response to market trends during this period, presenting both opportunities

Background

Bitcoin displays a strong seasonal pattern, similar to U.S. equities, with predictable and recurring trends. The most common seasonal effects are summarized below.

The September Effect

Often considered one of the most well-known seasonal trends in the stock market, the September Effect describes the tendency for stocks to underperform or decline in September. This pattern has been attributed to institutional investors selling off positions ahead of the fourth quarter and individual investors returning from summer vacations with a more cautious approach. September has historically

been the worst-performing month for U.S. equities, though it doesn’t hold true every year.

The October Effect

While October has a reputation for heightened volatility, it also has a notable "reversal" effect. Historically, several major market crashes have occurred in October (such as in 1929 and 1987), leading to increased market caution. Despite this reputation, October often marks a turnaround month, ending poorly performing streaks and sometimes initiating the early stages of rallies, especially as investors start to position themselves for the year-end.

Harvest Pressure in Commodities

In agricultural commodities like wheat, corn, and soybeans, fall is a key harvest season, creating a seasonal increase in supply. This “harvest pressure” typically leads to a temporary price drop, as farmers sell their crops to cover immediate costs. Commodity prices may rebound after harvest season as supply normalizes and demand picks up in anticipation of winter months.

Uptober

In “Forecasting Uptober” Cane Island used statistical analysis to confirm that October is a significant month for Bitcoin. Its performance is closely linked to network growth, especially as defined by Metcalfe's Law, during the previous months. This period's valuedriven changes, rather than short-term price fluctuations, show a measurable seasonal effect, particularly from August to October. Unlike other months, October's trends are momentum-based, meaning a strong or weak August often foreshadows similar performance in October. Cane Island’s value metric, based on stable on-chain data, reinforces this October effect by focusing on Bitcoin's intrinsic value rather than its market price, which can be volatile and less reliable for trend analysis.

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With meticulously crafted content, this book offers valuable insights into how the turbulent past of money led to Bitcoin being called "digital gold." It examines how Bitcoin aligns with the principles of good money established throughout history. This fresh perspective on the evolving finance landscape helps you understand why Bitcoin resonates as a groundbreaking form of currency.

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Santa Claus Rally Setup

Though technically a December/early January phenomenon, the Santa Claus Rally often begins with buying momentum in October and November. Investors and fund managers may begin reallocating portfolios in the fall to position themselves for a yearend rally. This phase often sees stocks trending upward as investors anticipate a strong final quarter.

Altseason

For many digital assets, this seasonality is particularly evident in “altseason,” which runs from January to May and mirrors the “January Effect” and “Sell in May” phenomena observed in traditional markets. During altseason , digital assets tend to outperform Bitcoin, showing larger gains and smaller losses. Outside this period, especially during Bitcoin bear markets, digital assets experience smaller gains and larger losses. Studies show that this seasonal effect is statistically significant and persistent over time, driven by market flows and user growth, which are magnified in altcoins due to their smaller market share.

Back-tested portfolios that dynamically allocate between Ethereum, Bitcoin, and cash based on seasonal patterns have historically outperformed static buy-and-hold strategies. Since 2015, such strategies have shown remarkable performance, outpacing a buy-and-hold Bitcoin strategy by hundreds of times and a buy-and-hold Ethereum strategy by a factor of five. Over just the past three years, a seasonal allocation approach has outperformed buy-and-hold Bitcoin by three times. These patterns likely stem from a combination of human psychology and immutable temporal factors, making seasonal trends enduring. Rational investors who adjust their asset allocation to leverage these effects stand to achieve superior returns, further reinforcing and perpetuating these seasonal patterns in the crypto market.

Bitcoin in U.S. Election Years

Stock markets are generally more volatile in election years due to the uncertainty surrounding potential policy changes. The months leading up to the election, especially from August through October, can see increased fluctuations as investors try to anticipate the likely election outcome and adjust their positions based on each candidate's economic agenda. However, volatility often decreases after the election, regardless of the winner, as markets prefer resolution and certainty.

This is not true for Bitcoin. With regards to volatility, it behaves almost the exact opposite of U.S. equities.

Bitcoin’s Volatility

Table 1 shows that Bitcoin is more volatile during nonelection years.

BITCOIN VOLATILITY, JANUARY - OCTOBER

1 ANOVA (Analysis of Variance) is a statistical test used to determine whether there are significant differences

An ANOVA test1 found a statistically meaningful between the means of three or more independent groups. By comparing the variance within groups to the variance

TABLE 1

distinction among the three groups (p = 0.018), indicating that average volatility differs depending on the election type. Further, pairwise comparisons using Tukey's HSD test2 confirm that:

 Midterm years are significantly different from presidential years in terms of volatility.

 Presidential years also show a significant difference from non-election years.

These results demonstrate that volatility patterns vary systematically with election cycles, supporting the view that the observed differences are not merely random fluctuations. This suggests that election type influences market behavior, with investors responding differently based on the potential policy implications associated with each election cycle.

The relationship between Bitcoin volatility and election cycles can be interpreted in light of Bitcoin’s unique response to global uncertainty. Unlike traditional equities, which often experience increased volatility in U.S. election years due to policy uncertainty and then stabilize afterward, Bitcoin behaves almost inversely. Research indicates that Bitcoin tends to act as a hedge against global uncertainty, particularly at higher quantiles and shorter investment horizons [Bouri et. al, 2017]. This quality means that in non-election years, when uncertainties arise from sources other than U.S. electoral politics, Bitcoin volatility tends to increase as investors view it as a safe haven from traditional market risks.

During midterm and presidential election years, Bitcoin's role as a hedge may be less pronounced. Investors are more likely to focus on how election

between groups, ANOVA assesses if observed differences in group means are likely due to random chance or reflect a true effect. A low p-value (typically < 0.05) indicates statistically significant differences among the groups, suggesting that at least one group mean differs from the others.

2 Tukey's HSD (Honestly Significant Difference) test is a post hoc statistical test used after an ANOVA when the ANOVA

outcomes will impact traditional markets and asset classes directly tied to U.S. policy, leading to less demand for Bitcoin as an uncertainty hedge. In nonelection years, however, geopolitical events, economic disruptions, or regulatory shifts unrelated to U.S. elections create a distinct demand for Bitcoin as a noncorrelated asset, driving up volatility. Thus, Bitcoin’s volatility pattern aligns with non-election years as a “flight-to-safety” response, while its volatility remains relatively lower during election years, reflecting a divergence from U.S. equities and a strong correlation with global uncertainties instead of domestic political cycles.

This phenomenon is supported by the broader literature on Bitcoin’s role as a hedge, where its volatility is positively related to uncertainty indexes like the VIX during times of heightened global risk. This behavior provides Bitcoin with a unique “optionality” characteristic, where its price can spike during uncertain periods, supported by growing interest and a base level of demand from those who view it as a hedge. The adoption and capped supply of Bitcoin also contribute to a “floor value,” allowing it to absorb shocks and respond positively to global volatility, a dynamic that amplifies during non-election years as Bitcoin provides diversification against non-U.S. specific risks.

Bitcoin shares characteristics with those of traditional hedges like gold. In that regard, Bitcoin has “optionality" in a portfolio context: although Bitcoin shows weak hedge and safe haven properties, its potential to deliver asymmetric, option-like payoffs in times of financial turbulence makes it attractive to

results indicate significant differences among group means. Tukey’s HSD helps to identify which specific groups differ from each other by comparing all possible pairs of group means. It adjusts for multiple comparisons to control the overall error rate, ensuring that the identified differences are statistically reliable. This test is particularly useful when analyzing data with more than two groups, providing a clearer understanding of which pairs of groups show significant mean differences.

investors looking for uncorrelated, high-return opportunities.

Bitcoin's optionality derives from its volatility and unique market dynamics. Unlike traditional hedges that stabilize portfolios by providing low or negative correlation with equities, Bitcoin’s value is more responsive to investor sentiment and macroeconomic shocks. This high responsiveness makes it behave similarly to a call option, where it can provide substantial upside. Bitcoin's correlations with other asset classes tend to remain low or uncorrelated, allowing for upside without strongly impacting other assets in the portfolio.

Furthermore, during extreme market conditions, Bitcoin’s potential floor value due to limited supply and growing adoption mirrors the asymmetric payoff structure seen in options. Investors often value assets with a presumed capped downside but significant upside during volatile times, making Bitcoin an appealing choice in such contexts.

Bitcoin’s independence from central banks or government policies also gives it optionality-like features, as its price is not directly influenced by inflationary policies or fiscal interventions, unlike fiat currencies. This perception of Bitcoin as "digital gold" with option-like payoffs may contribute to its attraction in portfolios as a complementary asset with high volatility and the possibility of outsized returns.

Bitcoin’s Performance

Election years, especially U.S. presidential election years, have a documented impact on market volatility and returns due to uncertainty surrounding potential policy changes.

Figure 1 plots October returns (x-axis) against November returns (y-axis), with data points representing various years. This visualization provides insights into the relationship between October and November market performance, which can be influenced by election cycles, particularly in the United States. Here, we analyze this relationship, focusing on

how the election year effect might explain trends and deviations in these returns.

FIGURE 1

The chart shows two distinct trend lines, each representing different market behavior clusters.

First, we can see that the relationship between October and November is driven by momentum and not reversion. A strong October (above 20%) is followed by a strong November in most cases, and vice-versa.

Second, and most notably, non-election years consistently outperform the comparable election years by about 25%.

Conclusions

Based on the analysis provided, here are three key conclusions regarding Bitcoin’s volatility in relation to U.S. election cycles:

Bitcoin Exhibits Higher Volatility in Non‐Election Years Compared to Election Years

The data indicate that Bitcoin's volatility is significantly higher in non-election years, with an average volatility of 25.4% compared to 14.3% in presidential election years and 5.0% in midterm election years.

It could be that few major policies are enacted in election years. During election years, governments are often hesitant to enact major policies or regulations, especially those that could impact financial markets or carry political risk. This reluctance stems from the desire to maintain voter favor and avoid polarizing moves that might alienate certain constituencies. Politicians and regulators may prefer to postpone contentious decisions until after elections to minimize political backlash and maintain stability in the lead-up to the vote.

For Bitcoin, this translates to a more stable regulatory environment during election years. With fewer legal or regulatory changes affecting its market, Bitcoin faces less uncertainty from potential government intervention. This stable backdrop reduces the likelihood of significant market reactions that typically arise from new regulations or policy shifts.

As a result, Bitcoin tends to be less volatile during election years, as regulatory and legal frameworks remain largely unchanged. In contrast, non-election years often see more active policy changes and regulatory actions, both domestically and internationally, which can impact Bitcoin’s market dynamics. These shifts introduce new factors for investors to respond to, driving speculative demand and increased volatility in Bitcoin as it reacts to broader global economic and regulatory developments.

This pattern suggests that in non-election years, Bitcoin’s volatility is influenced by potentially new policy shifts and other global uncertainties. This increase in volatility during non-election years may be due to external economic disruptions, geopolitical events, or regulatory developments, which can drive demand for Bitcoin as a hedge against traditional market risks.

Distinct Investor Behavior in Election Years Reduces Demand for Bitcoin as a Safe Haven

During election years, especially in the lead-up to the U.S. presidential and midterm elections, traditional markets tend to experience increased volatility due to

political uncertainty. However, the data shows that Bitcoin's volatility does not rise in these years to the same extent as in non-election years. This may be because investors are more focused on the potential impacts of election outcomes on traditional assets, leading to reduced demand for Bitcoin as a safe haven. As a result, Bitcoin's role as a hedge against uncertainty is less pronounced during election cycles, with investors less likely to turn to it as a refuge from political risk.

Bitcoin’s “Optionality” and Safe Haven Characteristics Amplify Volatility in Non‐Election Years

The unique "optionality" feature of Bitcoin—its ability to provide asymmetric, option-like payoffs—makes it especially attractive in times of heightened global risk that are not directly tied to U.S. elections. The literature suggests that Bitcoin acts as a hedge against global uncertainty, particularly at higher quantiles and shorter investment horizons (Bouri et al., 2017). In non-election years, when broader economic and geopolitical uncertainties are more likely to impact the market, Bitcoin's capped supply and increasing adoption establish a perceived floor value, allowing it to absorb shocks and remain attractive to investors seeking uncorrelated, high-return opportunities. This dynamic enhances Bitcoin’s volatility in non-election years, as its speculative appeal and perceived role as "digital gold" drive more significant price swings in response to global uncertainties.

References

Bouri, E., Gupta, R., Tiwari, A. K., & Roubaud, D. (2017). Does Bitcoin hedge global uncertainty? Evidence from wavelet-based quantile-in-quantile regressions. Finance Research Letters, 23, 8795.

Cane Island Digital Research. (2020). “Proof of Altseason.” www.cane-island.digital

Cane Island Digital Research. (2024). “Forecasting Uptober.” www.cane-island.digital

Chopra, M., & Mehta, C. (2022). “Is Bitcoin a diversifier, hedge or safe haven for traditional and alternate asset classes?” Cogent Economics & Finance , 10(1), 2156092. https://doi.org/10.1080/23322039.2022.2156092

Disclosures

Bitcoin and digital assets are highly volatile, subject to manipulation, lack of regulatory oversight, and protective legal framework. Its value is largely derived from its acceptance as a store of value and a medium of exchange among those who use it. Consequently, prices may fluctuate widely and unexpectedly, resulting in long and short-term losses. Do not invest more than you can afford to lose.

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