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15 January 2020

BSV pump (and dump?): analysis of the recent market movements

Patrick Heusser

Patrick Heusser

Senior Trader at Crypto Broker AG

About the author

Bitcoin Satoshis Vision (BSV) is (or has been) in the spotlight for the past few days. In addition to addressing the large price increase, we thought we would dig a bit deeper into the structure and relationship between the Bitcoin fork coins (BCH and BSV).

To understand our approach, you need to understand the basics of bitcoin mining (SHA-256). You can use the same hardware equipment to mine BTC, BCH, and BSV: switching from one chain to another only requires some minor changes on your node setup.

Our thesis implies that miners are solely economically driven and will mine the coin that generates the largest reward in terms of USD. Therefore, you would expect the ratio of Price vs Hashrate to be more or less the same for all three coins. If the ratio for one of the coins diverges, you should expect a reaction in either price or hashrate.

Currently, this is not the case, which opens the door for Craig Wright and Calvin Ayre to arbitrage the system. Our short analysis is inspired by this twitter thread. In simple words, we believe that he is trying to say the following:

As Calvin Ayre dominates the BSV mining/hashrate, he could switch a portion of it to BCH without losing too much in BSV mining reward, meaning that he will get the BCH mining reward almost for free.

The BSV miners, which is in fact just Calvin Ayre, will switch his mining activities to the more profitable coin BCH. Since he is controlling a very large stake of the hashing rate on BSV, he will not feel the opportunity costs by doing so. This means that he will get those BCH mining rewards almost for free.

Selling the BCH mining rewards into USDT gives him a war chest that he could use to pump BSV. With that war chest he is switching them into USDT, which is fairly easy as it is a liquid market. After that, he can use the USDT to pump up his coin BSV. The crux of the story is that the Bitcoin community has paved the way for him to be able to play this game. A lot of miners refused to mine BSV, which played all of the hash rate into his hands, and they pushed many exchanges to delist BSV as well, which made the coin very illiquid and predestined for pumps.

We have added some on-chain data analysis from coinmetrics.io to illustrate this a bit better.

Red line: BSV.DiffMean/BSV.PriceUSD (left axis)
Blue line: BCH.DiffMean/BCH.PriceUSD (left axis)
Green line: The ratio between the above lines (right axis)

This basically shows that the market is mainly functioning economically most of the time. And this means that miners switch to the coin that shows the best rewards for their expenditure, which is to keep the ratio (green line) close to one. Whenever the ratio moves away, it is driven by a short pump or dump in either of the two coins, but gets corrected very quickly through price adjustments from either side.

Now, we are again moving sharply away from a normal ratio driven by the possible play of Craig Wright and Calvin Ayre. We are very curious to see how it will correct over time…

BCH & BSV (blue) price comparison vs. BTC:

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