1 Bitcoin + 1 BitcoinCash = 1 Bitcoin ???

Everybody who is following Bitcoin knows that on Aug 1st 2017 at 12:30 UTC something big is going to happen: that time marks zero-hour for the announced BitcoinCash hard fork, the most serious attempt to split the BTC blockchain so far. If the split succeeds technically – which is very likely – those who hold BTC in their own wallet will also own the same amount of BitcoinCash in the split chain.

For those who hold BTC in an exchange, instead, what will happen depends on the specific exchange. Some big exchanges (eg Bitfinex, Kraken) will assign the new BitcoinCash to the customers who hold Bitcoin at the time of the split, while other ones won’t (eg Coinbase, Poloniex). Let’s call the first group of exchanges Group A, and the second one Group B.

The existence of these two different groups creates a very interesting market pricing problem. In normal conditions, the exchange rates of BTC to USD1 on different exchanges should be, and are, almost the same. The reason is that, when the prices diverge, this creates a great opportunity to make easy money with arbitration, and I’m sure there are lots of arbitration bots at work between all major exchanges.

But, as Aug 1st comes closer, we’re not in normal conditions for the exchanges. Specifically, the situation is very different between Group A and Group B.

At time Split+1, a customer who had 1 BTC in a Group A exchange will have 1 Bitcoin (BTC) + 1 BitcoinCash (BCH aka BCC). A customer who had 1 BTC in a Group B exchange will have 1 BTC and 0 BCH.

If the market behaved rationally, what we should expect on an exchange of Group A is clear enough. If the market expects BCH, at time split+1, to have a non-zero value of BCHt1 USD, and BTC to have a value of BTCt1 USD, then the price of BTC just before the split should (BCHt1 + BTCt1) USD.

In other words, during the split on a Group A exchange, the market value of BTC in dollars should rationally decrease of the expected market value in dollars of BCH. If we call BTCt0 the value in dollars of BTC just before the split, then we should have that BTCt0 = BCHt1 + BTCt1

But what about Group B exchanges? If you hold a BTC there, you won’t get any BCH. In a rational market, this should mean that, right before the split, the market value of BTC in USD on a Group B exchange should be BCHt1 = BTCt0 – BCHt1, ie, lower than on a Group A exchange.

As I write these words, less than 3 days before the split, the USDT price of Bitcoin on Bitfinex (Group A) and Poloniex (Group B) is exactly the same. At the same time, the only future I know of for BCH, is 0.128 BTC.

Rationally, this doesn’t make sense; the USDT price of a BTC on Poloniex, if the futures represent the market expectations, should be 1/1.128 that of the price on Bitfinex – around 11% lower. Even if the market expects for BCH a much lower – but still non-zero – value at time Split+1, there should still be a difference between the BTC price in USD in Group A and the Group B exchanges.

I suspect that the arbitration bots are still at work as usual. But, as we get nearer time Split+1, they should be turned off, unless their owners are sure that the market value of BCH will be close to 0; if those bots don’t get turned off and the BCH value is not zero, the owners of those bots could lose a lot of money. If instead the value will actually be close to 0, it’s the owners of those futures – and all the believers in BitcoinCash who are going to dump BTC for BCH – who are going to lose a lot of money.

Even if the owners don’t turn off the arbitraging bots, market forces could exhaust the bots funds. I’m really curious to see what’s going to happen – personally I expect the BTC prices to diverge between Group A and Group B exchanges at some point before zero-hour, specifically, prices on Group A to go higher – possibly near ATH, as BitcoinCash believers price in the BCH expected value, and non-believers just feel FOMO.

If and when the divergence will happen, it will be VERY interesting to keep an eye on the difference. Let’s see.

EDIT: it’s not just arbitration that can keep the prices in line, it’s also the possibility to buy BTC at a low price on eg Poloniex, and then move them to your own wallet and still get your BitcoinCash. But that window is rapidly closing – looks like it’s already almost impossible to move BTC out of Coinbase, and all movements should stop Aug 1st. At that point the divergence should really get interesting.

1 keep in mind that some exchanges use actual USD, and some use USDT, so to compare the prices you also need to consider the conversion rate between USDT and USD