A Strong ‘Night Effect’ for Bitcoin: All of bitcoin’s gains come from overnight

Time for another update on the Bitcoin method, in which I describe a ‘night effect’ for Bitcoin, similar to one that has existed for stocks for decades. A highly-cited paper from 2008 describes a night effect for stocks:

We use transaction-level data and decompose the US equity premium into day (open to close) and night (close to open) returns. We document the striking result that the US equity premium over the last decade is solely due to overnight returns; the returns during the night are strongly positive, and returns during the day are close to zero and sometimes negative. This day and night effect holds for individual stocks, equity indexes, and futures contracts on equity indexes and is robust across the NYSE and Nasdaq exchanges. Night returns are consistently higher than day returns across days of the week, days of the month, and months of the year. The effect is driven in part by high opening prices which subsequently decline in the first hour of trading.

To recap the rules of my shorting method:

At the start of the trading session, 6:30 AM PST, I short Bitcoin and go long QQQ/NDX_100 in equal size. So for a $100k portfolio this would entail buying $50k of QQQ/NDX_100 and shorting $50k of Bitcoin. Both legs are kept open for the duration of the trading session and closed at 1:00 PM PST, for a total of four trades. Nothing is kept open overnight. It’s repeated the next day with the same percentage allocation.

As shown in the chart below (simulating the growth of capital and trading with Google Sheets and using historical data for Nasdaq-100 and Bitcoin), the method went from being down 2% in the last update, to being flat for the year as Bitcoin hovers around $64.5k:

As per the the aforementioned rules, this assumes a 50/50 split in short Bitcoin and long QQQ, and only shorting Bitcoin during the day when the NYSE is open.

What if we allocate 100% of the capital short Bitcoin (no QQQ), as per the same timing rules:

Amazingly, it breaks even despite Bitcoin being up 54% for the year. This shows how strong the night effect is, and how weak Bitcoin is during market hours. The maximum drawdown was 20% as Bitcoin surged from $38k to its peak of $74k, which is way better than the near 95% drawdown of shorting it outright with 100% of the capital. Moreover, it gained 20% as Bitcoin fell from $74k back to $64.5 today, so it does capture the downside of Bitcoin even if shorting is restricted to a specific timeframe.

To be able to short Bitcoin profitably in a bull market, or at least to break-even, has proven elusive despite the best efforts by experts. Bitcoin put options have extremely high premium and decay. Shorting Bitcoin outright without timing can entail rapid losses. AFIK, I was the first person to identify such a night effect for Bitcoin, which consequently yields a profitable and easy way bet against Bitcoin by isolating the timeframe for which shorting Bitcoin is profitable, that being when the NYSE is open.

This also demonstrates that having superior IQ is much more than just puzzle-solving or test-taking ability, but has real-world applications to solve difficult problems, like finding a safe way to bet against Bitcoin. As Bitcoin falls to $20k over the next year or so, which is a given, this method should hit paydirt instead of only breaking even. I will be here profiting all the way back to $20k or even lower, which I should have done in 2022 but I missed out. I won’t miss out this time.