Bitcoin Cash Surged 11% Over the Weekend: 1 Reason to Be Excited and Worried at the Same Time

I've found that crypto investors can often be among the most technically focused in the market. That's due in part to the fact that there aren't the same kinds of fundamental metrics to rely on when looking at these nascent and fast-growing technologies compared to other assets such as equities.

That's certainly the case with tokens such as Bitcoin Cash (CRYPTO: BCH), which has been on a tear of late in part due to these technical factors. Traders have long eyed the $550 level as a key threshold to be passed, with many looking toward the next key level of $820 per token (upside of around 50% from here).

That's fine for those who follow such investing methodologies, but I don't. Here's what I see as the key driver of the recent rally in Bitcoin Cash, and why I think this particular catalyst could be both a good and bad thing for investors over time.

Derivatives volumes surging: Is that good or bad?

Image source: Getty Images.

Investors who place large bullish bets on a given cryptocurrency, whether such bets are direct purchases of said tokens or made in the derivatives market, tend to be based on fundamentals such as adoption and activity on a given blockchain. And on these metrics, Bitcoin Cash has certainly seen plenty of positive movement over the past month, with active addresses continuing to increase each and every day, recently hitting an all-time high.

That said, a heightened number of bullish derivatives bets has clearly become one of the key catalysts behind the surge in BCH we've seen over the weekend, and for most of October for that matter. So-called whales (large investors in Bitcoin Cash) have upped their investments in this token, with open interest surging to more than $380 million in recent days.

Looking at the data around liquidations courtesy of Coinglass, it's clear that most of the derivatives bets that are being placed are on the long end, with most similar short bets being liquidated over the past 24 hours (more than half a billion dollars of such bets have been liquidated over the past day, at the time of writing).

If these trends continue, momentum would dictate that a move toward that aforementioned psychological threshold of $820 could be possible. However, if these trends revert, there could be plenty of near-term downside ahead, as these bullish trades are unwound.

For now, momentum appears to be in the right place, but I'm going to happily watch this token from the sidelines for the time being.

Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.