Causation Equals Correlation

Much like triangulation, using three points to discover the location of a fourth point based on its distance to the other three, unrelated factors can contribute to finding common ground.

(Above are the charts for a lesser known currency, the Sand Dollar - SD)

The crypto markets are remarkably correlated on a macro scale. The fact often goes totally overlooked in mainstream crypto media. However, we view it as one of the most defining factors influencing our trading strategy.

The correlation is not caused by any specific factors. Instead, it has to do with the way the market is organized:

Bitcoin's value is primarily measured in USD, like most things. However, the relationship to equities stems from their direct dependency on USD. It is a simple increase or decrease to define the value of USD and equities, not quite as simple with crypto.

Bitcoin can be measured in USD, giving it a clear equities type value. However, Alt-coins are primarily measured in BTC. Meaning their value is derived not from how much USD they are worth but rather their weight in BTC.

The structure causes some problems:

Macro correlation. If Bitcoin says 'Jump' the Alt-coins say "How high?" although sometimes they jump higher or fall short, they rarely shy away from this dependency.

Alt-coins valuation. Measuring in USD, you are dealing with a cut and dry system for valuations. However, USD and Alts are not strongly connected. The lack of a connection means it does not entirely matter what price you acquire Alts at in USD. The connection between Alts and BTC indicates that the relative, effective, value methodology is found in a crypto/hybrid model.

The intricate dependency means USD traders investing in Alts have a simple gain loss system. However, BTC based traders have a set of different measurements.

If BTC increases in USD, Alts will increase in USD.

  • If Alts increase LESS, the trader losses BTC but gains USD.

  • If the Alts rise MORE, the trader gains BTC and USD on top of BTCs gain.

If BTC decreases in USD, Alts will decrease in USD.

  • If the Alts fall LESS, BTC will be gained, hedging against the devaluation.

  • If the Alt falls MORE, the trader losses BTC and USD.


  • Alts can Increase in value

  • Alts can Decrease in value.

Without giving away too much of the playbook, the methodology and reasoning are essential to the way we view the market. To Gumbo, the cause is due to the correlation.


Recent Posts

See All