Huge position switch from bitcoin to bitcoin cash

In a world of low volatility, the cryptocurrency space stands out above all others, although this is not a new theme and understanding and harnessing volatility in the crypto space has been key all year.

Source: Bloomberg

In the past two days, this volatility and range expansion has been taken to a whole new level. We’ve seen absolutely huge moves, with clients extremely active in bitcoin and bitcoin cash.

The big news, if true, is that some are now speculating that bitcoin cash, which forked out of bitcoin in August, could indeed hold a larger market cap over bitcoin and certainly over Ethereum in the weeks ahead. That is a big ‘if’ given bitcoin cash’s current market cap is still just 25% of that of bitcoin’s $95 billion market cap. But that is the sentiment seen in the market right now and is backed by talk (source: that miners are finding it more profitable and are subsequently putting more effort into mining for bitcoin cash over bitcoin. This seems key.

There seems little doubt that the moves have been spurred from last week's failed fork and the lack of consensus from developers, with the subsequent decision not to go ahead with the much anticipated “Segwit2x”. This would have allowed greater capacity and ability to transact using bitcoin, so the failure to push this through and ‘fork’ has seen huge capital rotating out of bitcoin and into bitcoin cash. Bitcoin cash is seen as the better store of wealth due to its potential for commercial purposes, and having an identity and clear investment case is so important to further appreciation in this space.

If you see crypto as a store of value or wealth, then a number of big players in the market are saying bitcoin cash is now your preferred vehicle to express this view.

The question then is where to from here, as the moves have been absolutely breathtaking. Ideally, the trade has been to be long bitcoin cash and short bitcoin as a ‘pair’s trade’. It feels as though this trade still have some juice, and the trick to this strategy is making sure we have exactly the same USD face value (position size multiplied by the price) on both legs, so as not to create a directional bias.

Naturally, the bulk of our flow would have been to speculate on just one instrument.

Importantly, given this volatility it is absolutely imperative to assess and adopt correct position sizing as the crypto space is seeing such huge prices ranges. Placing stops, when one trade using longer-term timeframes (such as daily charts), results in traders having to take on more risk, as their placement of the stop loss is further from entry and again this feed into ones exposure to the instrument. So again if trading these markets one clearly needs to understand adapt to the risk when trading a highly volatile market.

Judging by news flow and sentiment alone, there seems more upside risk to bitcoin cash despite price having already rallied from around $620 to $2087 in four days, and at $1520 (the current price at writing) one questions if this ‘pullback’ now a more compelling entry point. The preference is to wait for the buyers to really support and we see a renewed shift higher from here before putting new money to work. Bitcoin peaked at $7877 and currently sits 25% lower at $5879, although support and buying activity is kicking in after trading down to $5603. Again, whether the shake-out and repositioning into bitcoin cash are over is something we shall watch with great interest.

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