Understanding Bitcoin and Bitcoin Cash Correlation
The relationship between Bitcoin (BTC) and Bitcoin Cash (BCH) presents unique opportunities for cryptocurrency investors. Over a 3-month period, these assets exhibit a strong correlation coefficient of 0.88, indicating they frequently move in tandem. While this high correlation suggests limited diversification benefits, understanding their interplay helps investors:
- Assess diversifiable risk in combined portfolios
- Develop pair trading strategies (long BTC/short BCH or vice versa)
- Evaluate market volatility patterns for each asset
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Key Findings from Price Analysis
| Metric | Bitcoin (BTC) | Bitcoin Cash (BCH) |
|---|---|---|
| 90-Day ROI | Lower | 3.96x higher |
| Risk Level | 2.15x safer | Higher volatility |
| Risk-Adjusted Return | 0.19 | 0.35 |
Diversification Potential: Limited but Strategic
While BTC and BCH show very poor diversification potential due to their 88% price correlation, investors can still benefit from:
- Volatility Arbitrage: Capitalize on differing risk profiles
- Temporal Divergences: Exploit short-term price decoupling
- Fundamental Shifts: Position for technological roadmap differences
Critical Insight: The overlapping price movement means only 12% of risk can be diversified away by holding both assets simultaneously.
Pair Trading Implementation
This strategy involves simultaneously:
- Going long on BTC
- Going short on BCH
Advantages:
- Hedges against systemic crypto market risks
- Profits from relative performance differences
- Reduces exposure to overall market direction
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Execution Considerations
- Monitor correlation daily (100% tracking accuracy observed)
- Rebalance positions when correlation deviates >5% from historical average
- Allocate based on volatility (BCH requires larger position sizing for equal risk)
Risk-Adjusted Performance Analysis
Both assets demonstrate good performance relative to global equities:
- BTC: Ranked better than 19% of equities
- BCH: Ranked better than 19% of equities
Note: Despite strong returns, both remain more volatile than traditional assets.
FAQ: Bitcoin and Bitcoin Cash Dynamics
Q: Why do BTC and BCH have such high correlation?
A: Shared technological roots, overlapping investor bases, and similar market exposure create price linkages.
Q: When might their correlation decrease?
A: During protocol upgrades, exchange listing differences, or distinct adoption trends.
Q: Is pair trading safer than holding either asset alone?
A: Yes, it reduces overall market risk but introduces relative performance risk.
Q: How often should correlation be checked?
A: Weekly for long-term investors, daily for active traders.
Q: What's the optimal portfolio allocation?
A: Depends on risk tolerance; typically 60-80% to the lower-volatility asset (BTC).
Conclusion: Strategic Coexistence
While Bitcoin and Bitcoin Cash move strongly together, sophisticated investors can:
- Extract value from small divergences
- Manage risk through paired positions
- Monitor for changing correlation patterns
The $38,539 investment example demonstrates BCH's recent outperformance (32.35% in 90 days), but BTC's stability remains appealing for risk-conscious portfolios.