September is BTC's worst month. What's driving the 'September effect'?

A closer look doesn’t show any improvement. Bitcoin has fallen in nine of the 13 Septembers on record, according to a detailed analysis by NYDIG. September 2011 was Bitcoin’s worst month ever, with a 41.2% drop. As of last Sunday, Bitcoin is down 7% so far this month.

Bitcoin isn’t the only asset to be affected by the back-to-school season. Since 1929, September is the only month in which stocks have fallen more than they have risen. The effect is particularly pronounced in the tech-heavy Nasdaq 100.

Economists have tried to attribute this to a variety of factors — increased volatility after the summer economic slowdown, mutual funds suffering losses at the end of the fiscal year — but no one is sure.

Whatever the reason, it’s happening again: As of Friday, September 6, the Nasdaq 100 is down nearly 6% this month.

Average monthly gain of the Nasdaq 100

The U.S. SEC’s office hours are from October to September each year. Historically, this means that you tend to see a lot of enforcement actions in September as lawyers try to complete their quotas for the whole year. Unsurprisingly, the U.S. SEC enforcement season is heating up: this month, we’ve seen the SEC reach a meaningful settlement with crypto fund provider Galois Capital, as well as a Wells notice against NFT platform OpenSea. Many predict that by the end of the month, lawsuits and settlements against crypto entities will be more intense. I wouldn’t be surprised; I’ve been hearing rumors of larger enforcement actions since early summer, and we’ve long warned about the dangers of the SEC enforcement season.

I’m not sure the SEC’s Damocles sword is enough to explain the “September effect,” but it’s certainly not positive.

Probably the best explanation I’ve heard for the September effect is that it’s just self-reinforcing: people now expect September to be bad, and it turns out to be. While this may not sound earth-shattering, it’s not: expectations drive markets.

In contrast, Bitcoin investors have historically loved October — after all, October is known as “Uptober,” thanks to Bitcoin’s average 30% gain that month. This may have fueled investors’ animal spirits. Historically, October and November are among the best months for crypto investors.

Like many, I’m not quite sure what to make of the “September Effect.” It’s unclear how much of an impact the factors above have, whether it’s purely an anomaly, or whether there are a variety of untapped forces at work. Regardless, it’s affecting the psychology of today’s markets.

What I do know is this: Beyond seasonality, it’s most important to focus on the specifics of the current market. When I did that, I began to understand the reasons behind crypto’s weakness this September.

The U.S. presidential election will have a major impact on cryptocurrencies, and it’s currently a toss-up, with odds varying depending on whether you’re following Polymarket, PredictIt, or 538. I think we’ll see markets struggle to find their footing until we have a clearer picture of future leadership and policy.

The timing and magnitude of the Fed’s rate cuts are hotly debated. Despite widespread consensus that easing monetary policy is on the horizon, investors are feverishly recalibrating their bets: the odds of a 50bp cut in September are down, but the odds of a cut of more than 125bp in December are up.

ETF flows are mixed. While inflows into Bitcoin and Ethereum ETFs have declined (the U.S. Bitcoin ETF just experienced its longest period of net outflows since its January launch), if you look closely, advisors are adopting Bitcoin ETFs faster than any new ETF in history.

Baseline prediction: As this uncertainty starts to dissipate in October and November, we will see a big rally. This may or may not be a coincidence that this is in line with historical trends. Regardless, we need to be prepared.