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When It Comes to Cryptos, Ignore the Charts & Study the Fundamentals

InvestorPlace - Stock Market News, Stock Advice & Trading Tips Sometimes the right chart can be scary -- but correlation is not causation. Cryptos...

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This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investorplace.com - InvestorPlace

An interesting chart came across my desk about six weeks ago, and it was clearly intended to the scare the pants off of cryptocurrency investors.

The chart (attached below) shows that the Bitcoin boom of 2020 and subsequent crash in 2021 (gray line) almost identically tracks the previous Bitcoin boom-and-bust cycle of 2017/18 (blue line).

The implication is that – just as they did throughout the back half of 2018 and into 2019 – Bitcoin prices will continue to collapse in the back half of 2021 and into 2022.

At first glance, that chart is scary. I mean… look at how closely those gray and blue lines track each other. It’s unmistakable. And freaky.

But this chart was made six weeks ago. And what has happened since then? Bitcoin prices have soared! At the time this chart was made, Bitcoin prices were hovering just north of $30,000. But just last week, Bitcoin was north of $50,000.

So much for that correlation! As opposed to a back half 2021 collapse in Bitcoin, we got a back half 2021 surge in cryptos.

And that gets to the bigger point. This chart – and most crypto charts, for that matter – is complete bogus.

Cryptos Aren’t on Rails

Ever heard the phrase “correlation does not equal causation”? It’s a saying derived from the scientific community to emphasize that just because two things correlate to one another, that does not at all imply that there is some sort of cause-and-effect relationship between those two things.

Because the reality is that when you stack two squiggly lines up next to each other and play chartist to adjust the timeframes, you’re going to be able to correlate pretty much any two things in the world – and oftentimes, that correlation is going to be completely random, insignificant, and meaningless.

Example: The number of people who drowned by falling into a pool closely correlates with the number of films Nicolas Cage appeared in – I don’t think anyone here would make the argument that the two are related. It’s a completely random coincidence.

Another example: Per capita cheese consumption closely correlates with the number of people who died by becoming tangled in their bedsheets. A morbid correlation, sure. But significant or meaningful? No. Just random.

And another example: The divorce rate in Maine closely correlates with per capita consumption of margarine. Again, random and insignificant.

I could go on and on. But the point is clear. Correlation does not equal causation, and just because two squiggly lines line-up with one another, it doesn’t mean anything…

So, my advice on the chart I showed you to start this issue is simple: Forget it!

In fact, you should be ignoring all the charts when it comes to cryptocurrencies, because the fact of the matter is that charts will not determine the long-term value of Bitcoin, or Ethereum, or Cardano – the underlying blockchain fundamentals of each of those coins will determine how high (or low) those coins go over the next five to 10 years.

Spoiler alert: They’re going to go higher. A lot higher.

The Soaring Future of Cryptos

That’s because cryptocurrencies have the potential to, in the long run, disintermediate multi-trillion-dollar economic systems and make them freer, fairer, and faster.

Long story short, humans are innately untrustworthy. That’s just a fact of life. We all have different motivations, incentives, and goals. So, to create trustworthy systems out of innately untrustworthy people, humans have for thousands of years relied upon a central arbiter to provide control and order… in exchange for our money, freedom, or sometimes both.

Cryptocurrencies allow us to replace those central arbiters with a technology – a software platform – that provides control and order, and allows untrustworthy peoples to create trustworthy systems, without asking for money, freedom, or anything in return.

They do this thanks to a centralized, immutable, and thoughtfully constructed ledger that aligns the financial incentives of participants in a system to always act in the greatest interest of the system – not of the self.

It is this realignment of incentive structures that makes cryptocurrencies so profound. It makes untrustworthy humans, trustworthy… and allows us to create trustworthy economic systems without a middleman taking a fee, or biasing against certain individuals, or taking time to review transactions.

Cryptocurrencies will truly allow us to create freer, fairer, and faster economic systems.

We will replace Facebook with a blockchain social media platform that doesn’t require your data to monetize the platform…

We will replace YouTube with a blockchain streaming platform that doesn’t need to feed you ads every video to stay up and running…

We will replace Verizon with a blockchain telecom infrastructure that will give you free cell coverage everywhere you go…

We will replace Bank of America with a blockchain finance app that will allow you to send, receive, and store money, for free…

That’s the fundamental backdrop for cryptos.

The Bottom Line

I don’t care what the charts say. I don’t care what squiggly lines correlate to what squiggly lines.

I care about the fundamentals of blockchain technology because it is those fundamentals that will determine the long-term value of Bitcoin and other cryptos.

If that’s what you care about, too, then please don’t forget to tune in on Wednesday night, at 7 p.m. Eastern, when I am going to sit down with my colleague and legendary Bitcoin investor Charlie Shrem at our first-ever Crypto Code Event.

The topic of our discussion? As the name implies, we’re going to talk about the secret “code” behind all cryptos, and why this code is pretty much all that matters when it comes to whether you have a crypto winner… or crypto loser.

Better yet, we will tell you about our proprietary, quantitative system for deciphering this code which has enabled our team to create a portfolio of cryptocurrencies that is up a jaw-dropping 760%!

Sound like a can’t-miss event? That’s exactly what it is – a can’t-miss event.

So don’t miss it! Click here to reserve your seat now, and start your journey toward huge returns in the crypto market by paying attention to the right things and forgetting all the noise.

P.S. Did you hear? Last week, El Salvador did something remarkable… something unprecedented… and something which could be a sign of the future.

The country officially made Bitcoin legal tender.

The news almost got lost in the market panic that preceded the legislation, as the cryptocurrency market endured a “flash crash” just hours before the official announcement.

I’ll talk more about this significance of this in tomorrow’s essay. Until then, be sure to keep up with our daily essays for further context surrounding our Crypto Code Event Wednesday, Sept. 15, at 7 p.m. Eastern.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

The post When It Comes to Cryptos, Ignore the Charts & Study the Fundamentals appeared first on InvestorPlace.