This week has seen an enormous rally in Bitcoin Cash (BCH) prices from the $300 level to as much as $500. Why the rally all of a sudden, and what does it imply about how the market views this fledgling cryptocurrency?
Since its debut on August 1st, BCH prices have angled down from volatile trading around the mid-$400’s to the $300 level where it has been coasting along for the majority of the past two weeks. All the while Bitcoin (BTC) prices had been celebrating a SegWit-fueled moonshot to set new all-time highs.
As BTC reached highs around $4,500/coin this week it seems traders have been taking some profits. When doing so they have two options, they can withdraw their funds into fiat, or they can move them into another, possibly less over-bought, cryptocurrency. While some of these profits undoubtedly moved into fiat, it looks like a good number of traders have been buying up Bitcoin’s little brother, BCH.
Why BCH?
Well, there are two possible reasons traders may wish to bump up their BCH holdings. The first reason is a desire for diversification. Many who trade cryptocurrency keep a diverse collection of crypto-tokens in hopes of maintaining a diversified portfolio as well as not missing out on any “new moons”, so to speak.
The second possible reason could be attempts at pairs trading. Pairs trading is a form of arbitraging prices between two assets that share similar characteristics and are believed to be of similar risk profiles. A simplified example of pairs trading in the stock market would be if Coca-Cola and Pepsi, which had similar price-to-earnings (P/E) ratios, were to diverge significantly. If say, Coca-Cola had a P/E of 20 while Pepsi had a P/E of 5, it would imply that Pepsi’s is undervalued compared to Coca-Cola because the market is paying much less for each dollar of Pepsi earnings; even though Pepsi and Coca-Cola have very similar businesses.
To take advantage of the scenario, a pairs trader would simply buy Pepsi and sell Coca-Cola on the premise that the market would eventually correct for this mispricing; if only because other pairs traders are acting in a similar fashion.
If there is indeed some pairs trading going on between Bitcoin and Bitcoin Cash it could have a few interesting implications about the two assets. It could mean that the market views BCH as having a proportional value to BTC. This would imply that BCH would be expected to benefit, to a certain extent, from increases in BTC adoption and price, even though it’s not yet clear whether businesses will integrate BCH for purchases like they have with BTC. Additionally, such trading could translate into more price support for BCH going forward.