Fooled by Randomness - The Daily Gwei #248

Correlation does not equal causation!

The human mind always wants to find explanations for everything because we inherently want to make sense of things. This is especially true in the markets where people will try to draw a relationship between some news event and the market acting in some way. Though, most of the time, these people are simply fooled by randomness.

The crypto markets had quite the dip over the weekend with BTC falling to $42,000 and ETH falling to $3,100 (from a high of $4,400 just a few days ago). Naturally, people wanted to find a “reason” for the weakness in the market and started pointing to all of the things I listed in my tweet above (especially Elon’s tweets). Though the reality is that markets are chaotic and work off of millions of different inputs that can’t simply be explained by pointing to any one particular piece of news. Reading and predicting what the market will do is so difficult that literally billions of dollars goes into studying it every year to simply find those ever-coveted nuggets of “alpha” that all investors are looking for.

Of course, many people will point to Elon Musk’s recent tweets about Bitcoin as another reason for the recent sell-off. Personally I think the reality is much more nuanced than this as BTC had been weak for some time now - it rejected going into price discovery by dumping off of $65,000 and also closed below the 20 week moving average for the first time since September (this indicator is typically referred to by traders as the “bull market support line”). Astute readers will be quick to notice the irony of me pointing to an event to explain a price move but that’s my point - everyone will have their own explanation or reasoning to try and justify market movements!

In saying that, I do think that certain news or announcements affect the markets over the short-term. The most obvious example here is when a new asset gets listed on a top tier exchange like Coinbase - that asset will usually increase in price following the announcement and a direct correlation can be drawn. Though, as I said, these sorts of things typically only play out over the short-term and there has been many instances where an asset simply sells off after an announcement like this and returns to its original state. So while you can sometimes point to correlations, they don’t necessarily play out 100% of the time - if they did, everyone would be able to trade these events perfectly.

At the end of the day, I believe that markets are chaotic in the short-term but over the long-term they act as a weighting mechanism for the inputs that they are fed. Sure, there’s plenty of extremely overvalued assets in the crypto ecosystem, but the value of them is being weighted by millions of different inputs that work to form what we all know as the “current spot price” of an asset. After all, if markets were easy to read and rational, there would probably be no alpha left for any of us!

Have a great day everyone,
Anthony Sassano

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All information presented above is for educational purposes only and should not be taken as investment advice.