Mean Reversion Bias

Mean reversion bias is the tendency of an asset's price to return to its historical average over time. Many quantitative strategies are built on the assumption that price deviations from the mean are temporary and will eventually correct.

However, in cryptocurrency, this bias can be dangerous because digital assets often exhibit long-term structural trends or regime shifts that invalidate historical averages. Traders who rely solely on mean reversion may find themselves "catching a falling knife" if the asset enters a new, lower price equilibrium.

This bias can lead to significant losses during sustained bear markets or periods of fundamental disruption. It requires a nuanced understanding of when a price deviation is a statistical anomaly versus a fundamental shift in value.