Sunday, 27 October 2019

Bitcoin rally and the end of the "avocado correlation" myth

On October 25th, Bitcoin value rocketed from 7,500$ to 10,000$ in 24 hours, which was a 40% price surge in a single day. This was a quite rare happening, even for Bitcoin, and similar performances only happened twice in its history, in 2010 and 2011, when BTC was worth respectively 0.40 and 5.65 USD.

Additionally, this unexpected rush took place while many crypto analysts were quite bearish on Bitcoin and already preparing for the next "crypto winter".

What are the reasons behind this rise?

Some claimed that it happened because of a statement by Cina's General Secretary Xi Jinping (as reported by Cointelegraph which translated the original news by Xinhua). Xi declared that Cina will "accelerate the development of blockchain", and, in less than one hour, the Bitcoin chart apparently responded to that with a price rise.

Binance Research on Twitter, on the other side, as reported by CCN, claimed that Bitcoin's price spike was due to Trump's trade war with Cina, and the tariff storm.
We should also consider the Bitcoin Futures on Bakkt and trading platforms, like Bitmex, allowing leverage trading on crypto, as potential influencing factors for this phenomenon.

I believe that such a massive market movement never happens for a single cause, but always depends on a mix of many different factors, and it's not so easy to attribute the correct "weight" to each of them.

How the Avocado correlation began, and how it ended

The side effect of this spike is to finally disproof the "avocado correlation" theory. According to this, the avocado price was showing an unusual correlation with BTC (see twitter post below form Tracy Alloway @ Bloomberg).


Fortunately, after the recent BTC spike, this correlation is no longer valid, and I would say it never was. It was just a temporary coincidence of trends, as it may happen frequently in many other cases. See below for the update from Tracy Alloway, which also noticed that.


Yes, spurious correlations happen many times, and they can't prove any effective connection between the two examined trends. Do you know, for example, that there is an almost perfect correlation (95,86%) between per capita consumption of mozzarella cheese and civil engineer doctorates awarded? You can find many illogical correlations like this one, visiting the Spurious Correlations website. This is just to demonstrate that you will always find two similar trends, no matter how uncorrelated they may be!


Image credit: Spurious Correlations
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