September Positioning

September Positioning | August 26, 2023

In this market brief we will cover some market expectations based on historical analysis in addition to current market factors.

While there are too many unknown factors to accurately predict short-term price action, we can use historical analysis to set expectations and give ourselves an edge over the market.

Historical September S&P 500 Performance:

On average, September is the worst performing month for the S&P 500.

Historically speaking, one could accelerate their returns from the S&P 500 each year by simply removing one’s exposure for the month of September alone.

There are thought to be several reasons why September is a poor performing month, though all are speculative:

• General lack of news that can push stocks higher, such as major corporate earnings.
• Large investors return from summer vacation and decide to adjust their holdings, dumping unwanted shares.
• Mutual funds, whose fiscal year by law ends October 31, seek to clean out their inventories

Note that just because September has negative returns on average, it’s still common for September to yield positive returns. In fact, roughly 45% of the time, September is a positive month for the S&P 500.

As it relates to the crypto markets, the implication here is that Bitcoin is largely considered a risk asset (like equities) and has a high correlation with SPX.

Historical September Bitcoin & Ethereum Performance:

September is also the worst performing month for Bitcoin.

Historically, Bitcoin has only seen positive returns in the month of September on two occasions: 2015 & 2016.

Both of those occasions saw very modest returns of 2% and 6% respectively. The implication here is that even in the positive performing years, missing Bitcoin’s September returns was not particularly costly.

Similarly, Ethereum has under-performed in the month of September.

Current Factors to Consider:

In addition to historical analysis suggesting September should be a month for a risk-off approach towards the market, there are several other negative catalysts that could come in September (as well as a few bullish ones).

Bullish Catalysts

• Grayscale vs SEC Win
• Grayscale is suing the SEC for not approving their request to convert the GBTC Trust to a Bitcoin Spot ETF. If Grayscale wins this case, it would almost guarantee the approval of a multiple Bitcoin Spot ETFs in 2024. This case is ongoing, but is expected to resolve in the coming weeks, as it is now in the 98th percentile for case duration. Case results are published here around 10am - 11am every Tuesday and Friday.
• Spot Bitcoin ETF Approval (not expected until 2024)
• A Spot BTC ETF would massively increase BTC inflows through legacy finance, making spot BTC exposure available through traditional markets.
• Ethereum Futures ETF Approval
• Rumors are swirling that the SEC plans to approve Ethereum Futures ETFs by October. This would be bullish as it would increase legacy inflows into Ethereum (to a much lesser degree than a spot ETF) but more importantly would indicate that the SEC does not view Ethereum as a security.

Bearish Catalysts

• The US government has seized ~33,000 BTC (~$1B) and has stated they intend to sell it by the end of this calendar year.
• Mt Gox is set to repay ~142,000 BTC to customers by October 31 (though this date may get delayed).
• FTX has asked for approval to sell $500M in various coins over the course of 5 weeks. The court will approve/deny this request on September 13th.
• Grayscale vs SEC Loss
• Grayscale losing to the SEC would mean Bitcoin Spot ETFs may not get approved, which would be bearish.
• Binance turmoil:
• Rumors are circulating that CZ, the Founder of Binance (largest crypto exchange in the world), has taken out a loan backed by BNB. Speculators believe CZ may be selling large clips of Bitcoin to buy BNB and defend the price and his loan against liquidation.
• There is also speculation that customer funds are being used to prop up the price of BNB. Should a bank-run begin on Binance, the biggest black swan event crypto has ever seen could ensue.
• The potential for additional rate hikes as stated this past week by Jerome Powell would be bearish for most risk assets (we feel additional rate hikes are unlikely, though rate cuts are also unlikely)
• Risk of recession or large legacy market drawdown. Many macro-economic factors, such as the inverted yield curve, indicate that there is potential for a large crash in legacy markets.

For those who wish to re-position for September, here are a few strategies.

Keep in mind, any on-chain yield farming will introduce smart contract risk.

Consolidation into BTC & ETH may reduce drawdown in the event of a poor performing September as BTC & ETH generally see lower drawdowns than lower cap altcoins when the overall market is trending downwards.

Pairs trading involves taking opposing positions on different coins. For example, if you think BTC will outperform the rest of the market, but is still at risk of moving downwards, you can take a long position on BTC and hedge it with short positions on a variety of altcoins you expect to underperform.

Hedging with options simply allows you to mitigate downside risk for a cost. If you are worried about downside risk in Bitcoin or Ethereum, but want to maintain exposure to both, you could simply buy puts on Deribit or LedgerX. Buying put options costs a premium, but pays you when the market crashes, offsetting losses in your portfolio.

Leverage trading is risky for those who are inexperienced, but allows traders to flexibly manage risk as needed. For example, should Grayscale win the case against the SEC, a leveraged position can get you a lot of long exposure to the market for a low cost while maintaining an other-wise risk-off portfolio. Should Grayscale lose the case, leveraged short positions can be used to benefit from a falling market.

Avoiding mistakes and preserving capital. Now, more than ever, is the time to avoid making simple errors (such as punting capital on high-risk trades/investments trying to get rich quickly). While historical data suggests the next 30-60 days may be rocky, we are quickly approaching multiple large bullish catalysts in 2024 with the Bitcoin halving and the possibility of a spot BTC ETF. There will be a time in the relatively near future to be heavily risk-on. Now is a time, however, where investing/trading errors have the potential to negatively affect our working capital going into 2024.