Amid the turbulent and uncertain times we face, one thing that is starting to surface is the talk of correlation. Funny how some things come around. I spent a large part of last year talking about correlation within the crypto market, and in that time, I pushed people to prepare for the notion of 2020 being the time of major talks about decoupling. At first, I thought maybe I was too far ahead of the timeline for it to matter. But, who would think it would be the threat of a pandemic that would bring it to the surface?
So, what is the decoupling, and why does it matter?
I'm going to discuss three pair decouplings that I think matter the most, and one in particular that stands out on top of this.
The three decouplings to cover are:
Bitcoin from the dollar
Altcoins from Bitcoin
All cryptocurrency from the stock market
The particularly important addition to this, being XRP being decoupled from Bitcoin.
Let me define and explain. Decoupling is the concept that correlations can be so strong, that they prevent natural independent movements in price action that people wish to see take place. Therefore, to break this, decoupling is the ability to break free from dominance, or reduce it, so that coins and stocks can have their own independent movement.
The entire trading market centers around people being able to purchase desired items at the lowest price they'd like, and those who already bought hoping to sell at as high a price as possible. If there is not enough activity in buys and sells, there develops a gap in the order book making it hard, or at least slower, for positions to enter and exit. Volume is the result of how many orders get matched. Liquidity is the good thing that happens when so many orders are matched, that the gap gets very narrow between buys and sells, and more people are happy, leaning towards a positive, increased trend.
To fully grasp the decoupling, we should look at the coupling. Starting with Bitcoin and the dollar. Trading pairs are a funny thing. Since the desired cycle is to buy low, and sell high, one can understand that the fiat item is going to be the most stable of the bunch, even with a pandemic lurking around us. Overall, since post WWII, the decision to peg global currency to the dollar was both an honor and a responsibility, and even though there will always be controversy, it was a decision that very likely helped the world avoid WW3 and 4. That is for another discussion, but if anyone were to think politics isn't deeply embedded in global economics... well, that's something significant enough for all to understand, and a sign the global schooling systems have failed miserably. But, hey, we all have the internet, so go learn cool stuff!
With Bitcoin trading against the dollar, people look for the dollar to remain a constant, while we know Bitcoin wanders wildly above and below the constant. Buying low offers the choice to take part in the next upward wave, and selling high offers people the opportunity to assume the next higher wave will come sometime. Here's the interesting part; if a person, again looking for the buy low, sell high, understands one takes place before the other, we can understand why every other coin that trades against Bitcoin, is looking to take advantage of pretty much the opposite of Bitcoin trading. When Bitcoin is low, there are certain categories of coins that are going to have a chance to climb higher, because they are pegged to the dollar (or digital representation like Tether USDT) and also to Bitcoin. So, while they have their own unique movement to the dollar based on fans of each specific coin, Bitcoin's movement is factored in to their results. Since Bitcoin continued to be the monster coin, it has more volume than most of the rest of the entire market. Coins that have their own fan base and huge volume, like Ether for example, can track with a positive correlation to Bitcoin most of the time. This means, if Bitcoin goes up against the dollar, then ETH does too. If Bitcoin takes a fast, sharp pump, ETH can fall behind in the ETH/BTC pairing, because BTC is launching ahead and volume tips in it's direction, but ETH is powerful enough of a force to rise to the dollar still.
For the most part, larger coins like ETH, XRP, LTC, sometimes BCH, sometimes others like NEO, EOS, ONT etc., are able to hold on to enough volume to go up with Bitcoin against the dollar. Almost anything smaller does so as well, but not in a 1:1 ratio, because they take a strong enough hit traded against Bitcoin for this to slightly reduce the affects of supply and value. You see, trading against Bitcoin and the dollar tend to have an averaging of value effect more and more depending on how small the coin's range, volume, liquidity spread across trading volume on whole.
So, Bitcoin's trading against the dollar has a ripple (not the company, the naturally occurring nature thingy) effect across all other coins. Another thing to understand here is dominance. Bitcoin has held 50% market dominance or greater for the majority of trade history. Recently, it broke through further to around 67%. In all honesty, 50/50 is a reasonable balance between all other coins, and Bitcoin. When it goes beyond this, it has an unbalanced affect on all other coins, even if they would be otherwise healthy. It can pound good coins down when it goes up too fast, and when it comes back down. Thus, we have seen a pitiful bear market for 2 years minus a single pump madness. While Bitcoin has had the honor to grow from less than a penny to as much as $20K, most alts have gone from all time highs (ATH), to 98% loss. And, now that the virus has turned the world as we know it upside down, that last little squeeze on the remaining 2% is closing in. I don't think most are gonna hit zero, but none of us (except the extremely crazy ones) are happy about this.
Bitcoin dominance speaks to how much is traded compared to everything else. This speaks to market capitalization, which measures volume of trades to the market price, speaking to quantity and quality.
So, with Bitcoin decoupling from the dollar, most people don't think it is a factor, but the point of this measurement is, that all other pairs, but mostly high ranking coins, can reduce dominance to a healthier range for the entire market, and we essentially see a slight reduction in Bitcoin's decoupling from the dollar, which in turn, increases the strength of other coin's decoupling to everything else. Crazy cool math stuff.
So, the most relevant decoupling people are interested in, is all of the altcoins from Bitcoin. We already see they are all able to benefit (or suffer) from Bitcoin's movement against the dollar, so they rise and fall similarly to Bitcoin against the dollar, making (mostly Tether) trade against the dollar possible to predict and earn from. But, the longest trend in crypto has been all coins against Bitcoin, and that continues to be huge regardless of bucketfulls of trading against the dollar (err Tether and a lil USDC and TUSD). If Bitcoin dominance can come even just a little below 50%, smaller altcoins have a fighting chance to rise from the ashes, and despite common belief bad coins just need to die off, the truth is the top 200-300 coins really benefit the market. Spreading choices around is super important for overall volume, and mass adoption looks for indications of growth in volume, so the two are related.
An altcoin decoupling from Bitcoin means that coins can, and should, have the ability to separate from movement determined by Bitcoin itself. We want to see more of a correlation between popularity, technological benefits, and strength, and not movement just because Bitcoin did something. It is a constant frustration from coin projects, often ones that do not understand their correlation between market price and project validity, and just plain dominance from Bitcoin. But, knowledge in this case, is power, and there are things that can improve the correlation if people were determined enough to learn this.
What we would like to see in a perfect world, is every single legit project, large and small, have the ability to trade against Bitcoin with enough juice to rise and fall based on its own innovations and announcements. "X" coin project makes a huge leap in their own mainnet release? They get a steady surge in value and not just a shill pump for 3 minutes. Coin "Y" has a bad hack, and we see not just short term FUD selling, but a steady down trend that matches bad sentiment. These things DO exist, but watch any of them take place, and you will see either a positive or negative correlation identical to what Bitcoin does, directly measured in.
The most relevant correlation that people are discussing, is the entire cryptocurrency market compared to the traditional stock market. In normal times, I get a little punchy, because people think news attribution is accurate, and it simply is not. For people that check in with crypto news loyally on a daily basis will always read articles about how the release of the new "x" caused Bitcoin to climb, or how the fear over oil caused Bitcoin to drop. I have the distinction of watching Bitcoin 12-18 hours every day, and I can tell you the largest buys and sells always, almost 100% of the time, happen hours before the news hits that people later relate to the 'reason' for the pump or dump. It is almost never ever ever related. People take comfort in knowing a logical reason why something so important happens. Unless they watch it live, they will believe the lies because it makes them happiest. Not good reasoning, but I'm tired of trying to explain against the power of denial.
For those that like truth, the primary factor in Bitcoin's price, other than now that we have a global crisis that affects literally every human on earth, is whales and miners going long and short. When the volume drops to the lowest points, Bitcoin will buy or sell hard. I've watched for more than two years now, and this has never ever ever ever ever ever ever stopped being reliable. So, if you think a scare story that takes 7 hours after Bitcoin took a dive can be the reason, when 99% of the time, every other time, it was because the volume dropped low enough to pump or dump with the least juice possible, then you aren't likely going to grab any smarts from this. Move along and read something about Doge instead, because 1D is always gonna equal 1D.
So, truly, the main reason we want decoupling from Bitcoin, is because the pumps and dumps that happen from whale action that is pre-planned and intelligently based on volume, will always take a huge hit on smaller coins, and not all of them are crap. Hundreds of these negatively affected coins are multi-million dollar projects with dozens of employees and coders working like mad to be the first to innovate something massively appealing and disruptive (in a good way). That defines the altcoin market. Now, with real FUD hitting every trader large and small, there is a very strong correlation to the stock market. Everyone truly is watching the same news cycles, and when stocks hit unprecedented triggers multiple times, it scares people to think it's going to make their coins tank. There is always a correlation between Bitcoin and stocks to a very small degree, because Bitcoin indices are part of the stock tickers, but signs of decoupling were largely less significant than the relation of alts to Bitcoin.
Now that people have significant losses in stocks, they are paying strong attention to how this impacts their crypto investments.
First, let me state, the biggest drop in Bitcoin from $7500 to $5500, and then later as low as $3800, started 3-4 hours before the stock market opened. I knew to watch things in the opposite order everyone has reported, because my primary time is spent in crypto. When I saw what Bitcoin did, I was very concerned at how things would open. Sure enough, it was bad. Each bad market day has been met with similar trends in crypto, and thus a decoupling would actually be the norm, and healthier. But, there is good news most people don't seem to understand. Ever since I started tweeting about it (and I am very small compared to real influencers) apparently people have been restating, instead of re-tweeting, verbatim what they argued against me about 2 weeks ago. Wuttevuh-lol.
Today, stocks took a -8% hit they couldn't afford. Yesterday Bitcoin held in the $5000's, as the have continued to do today. Nothing close to -8%. Thus, a decoupling. A permanent decoupling both of crypto from stocks, and altcoins to Bitcoin, would mean a much healthier market prepared for a major halving event.
Finally, I want to talk about a specific decoupling of XRP from Bitcoin. XRP has it's own very unique freakishly loyal fan base. I like this. I am not a major fan boy of Bitcoin or XRP specifically, but I am a fan of crypto and its potential to do good despite the knowledge that anything which could be a force for good, is going to equally have bad players and tyrannical governments on the horizon. Doesn't make the tech evil, just the people looking to benefit negatively. In XRP's case, it has fought a love hate battle for some time, because it shakes hands with all of those evil bankers, the antithesis of all that crypto-lovers loath in the world. But, we need real world use cases and mass adoption, and providing an amazingly high performance solution to real world trade and remittance is XRP's game, and it is rockin' it.
That being said, XRP is currently sitting at $0.14 when fans have been waiting with expectation for $2 and more. If they love XRP, have been buying and HODLing, then why such a dismal value at market? Desire and satisfaction should have the ability to drive price, and it doesn't. That is because of Bitcoin dominance, and it is a bad, frustrating thing. There is a strong community and leadership desire to decouple from Bitcoin, and in fact Ripple, creators of XRP, were among the only industry leaders discussing their desire to strongly break from the pressure and oppression of Bitcoin dominance last year. It would have been a good thing for that to already have occurred, but XRP is suffering under the crushing weight of Bitcoin despite that desire. If XRP can push through, it will be a strong move in the right direction. In fact, if we saw a 3-5% increase in market dominance from ETH, XRP, LTC and the turn-style of other top ranking coins, it would be the best thing to happen in crypto. One exchange in particular, of which this is not a shill, is Bitrue, who have an entire category of trading pairs dedicated to trading against XRP. The volume is actually pretty impressive too. They incentivize this with reduced fees for XRP pairs, so if you like the idea, check it out. Again, not a shill, and maybe there are other exchanges doing the same, but I've checked out 40 or so others that don't have it, so Bitrue gets the mention.
Whether it is XRP or ETH, LTC or LINK, the need for even the slightest rise in dominance can make all the difference in the power and growth of crypto mass adoption. If people currently in the market can get some of their value back, they will trade more and the market will benefit. If there is market growth, mass adoption will take hold from new members, and this is ultimately good for everyone. Think of this; if there is more adoption in crypto, it will have very little direct correlation to stocks, other than the worst of world events. That is a win for everyone.
Gordon Freeman Out.
