Spurious correlation: quant-fund count and an altcoin's price

Question

From 2015 to 2025 the number of active quant funds and the price of a small altcoin both climbed steadily. Their annual levels correlate at $r = 0.95$ . A junior analyst wants to trade the altcoin on quant-fund-launch news, citing the correlation.

Why is this correlation weak evidence of any real link, and how would you test for one?

Accepted Answer

The flaw: two trends will correlate no matter what. Both series are trending upward over the decade, so they are nonstationary. Any two variables that happen to drift up over the same period will show a high level correlation whether or not they have anything to do with each other; the correlation is driven by the shared march of time, not by a connection between quant funds and the coin. This is the classic spurious-regression trap: with trending data, even unrelated series routinely produce correlations near 0.9 and misleadingly "significant" regressions. How to test for a real relationship…

Spurious correlation: quant-fund count and an altcoin's price

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