According to CoinDesk: Singapore-based trading firm Presto Labs recommends a market-neutral trading strategy that involves going long on Bitcoin (BTC) and short on Bitcoin Cash (BCH) to capitalize on the dynamics of the ongoing Mt. Gox asset distributions.

Overview of the Mt. Gox Repayments

Mt. Gox, the now-defunct cryptocurrency exchange, has begun its long-anticipated repayment process to creditors affected by a 2014 hack. This repayment includes the distribution of $9 billion worth of Bitcoin (BTC) and over $73 million worth of Bitcoin Cash (BCH) between July 1, 2024, and October 31, 2024.

Trading Strategy: Long BTC, Short BCH

Presto Labs, a Singapore-based trading firm, is advising its clients to employ a market-neutral strategy to benefit from the Mt. Gox repayment process. The strategy involves going long on BTC and short on BCH. The rationale behind this approach is rooted in the differing supply and demand dynamics for these two cryptocurrencies during the distribution period.

Key Points of the Strategy

Supply/Demand Dynamics: Presto Labs believes that the supply impact on BCH will be significantly larger than that on BTC. Specifically, they predict that the selling pressure on BCH will be approximately four times greater than on BTC. This translates to 24% of BCH’s daily trading volume versus 6% for BTC.

Market Data: Over the past 24 hours, over $27 billion worth of BTC has been traded compared to $180 million in BCH. This substantial difference highlights the relative market sizes and the impact of Mt. Gox distributions.

Investor Behavior: Presto Labs assumes that investors receiving BTC from Mt. Gox are likely to be long-term holders ("diamond-handed") who will hold onto their BTC rather than sell it immediately. In contrast, they believe BCH recipients may be more inclined to sell their holdings promptly.

Technical Approach

Long BTC Perpetuals: Traders should take long positions in BTC perpetual contracts to benefit from the expected price increase driven by the relatively lower selling pressure on Bitcoin.

Short BCH Perpetuals: Traders should short BCH perpetual contracts to profit from the anticipated selling pressure due to the larger amount of BCH being distributed and sold by creditors.

Risks and Considerations

  • Funding Rate Risk: Presto Labs acknowledges that funding rates in perpetual contracts could affect the strategy's profitability. Traders should consider the costs associated with holding long and short positions.

Historical Context and Potential Outcomes

Historically, pair trading strategies such as this one capitalize on imbalances in supply and demand. By analyzing past distribution events and current market conditions, Presto Labs suggests that this approach could be effective for the duration of the Mt. Gox repayment period.

Presto Labs sees the Mt. Gox repayment process as a unique opportunity to profit from market inefficiencies through a market-neutral strategy. By going long on BTC and short on BCH, traders can potentially benefit from the differing impacts of the asset distributions on the two cryptocurrencies.