Since Bitcoin (BTC) price rallied above $19,000 in 2017, crypto analysts have issued an amazingly wide range of price predictions on the date and value of the next all-time high or low.
Sometimes these predictions are rooted in deep fundamental and technical analysis, whereas other times they are simply nothing more than off-the-cuff estimates issued at whim.
Options markets provide useful insights into traders’ expectations, including mathematical probabilities for an asset’s future prices.Using Black & Scholes model allows one to better assess the likelihood of analysts’ estimates.
The Black & Scholes valuation algorithm has been the basis for the pricing of options on traditional assets since the early 1970s, and remains widely used.
Although the Black & Scholes option pricing model tends to underestimate the odds of substantial movements, it does provide precise and conservative estimates.
Similar to weather forecasting, adding more than a couple of days to an estimate reduces its precision by a logarithmic proportion.One must also consider that the model has to predict a binary outcome because a $9,500 option will be deemed worthless if the expiry price is $9,499.Pundits price predictions are often way off the mark
Many analysts tend to exaggerate their estimates to make a bold statement and attract media attention, or their predictions are based on various types of bias.
No one expects gold bugs like Peter Schiff to draw a bullish Bitcoin estimate, and the same can be said for expecting a bearish prediction from Stock-to-Flow model author PlanB.
The question investors should be asking is exactly how far off were those estimates compared to Bitcoin options pricing? Furthermore, should one even consider these analysts and pundits opinions? Consider options mathematical probability
Although the Black & Scholes options pricing model can be complicated, it’s usage is pretty straight forward.By informing the current BTC price, strike level, days until expiry, and annual volatility, the model will instantly provide the odds above and below a specific price.
Skipping the complex calculations, one can refer to Skew Analytics to find current probabilities for each expiry based on options pricing.Bitcoin probability at options maturity.Source: Deribit
Most active option strikes expire on the last Friday of every month.
As previously explained, those figures will seem conservative.Both August and September strikes signify a mere 50% probability that Bitcoin price will remain above $9,000.
A 50% odd should is effectively neutral, as the mathematical model states that odds above and below such target are pretty much the same.
By contrast, the probability for a $8,500 on the July expiry (just two weeks from now) sits at 76%.The model becomes more confident as we approach maturity, so one should not expect options to price 90% plus odds for contracts with more than two weeks left.
Pundits predictions are often unreasonable
To assert whether analysts and pundits’ predictions fare better than options markets pricing, one needs to stack those odds against the Black & Scholes options model, which requires four basic inputs: current price, strike (prediction), days until expiry, and implied volatility.Bitcoin price and pundits predictions.Source: TradingView
The above chart depicts six predictions over a 100 day period, which will be individually tested against the options markets model.November 1, 2019: Changpeng Zhao predicts $16,000
Despite having said numerous times that he isn’t an active trader, Binance founder Changpeng Zhao often likes to publicize his predictions.
In early November, CZ declared that BTC would hit $16K ‘soonish,’ so one should assume four months.Bitcoin Price: $9,130 Strike (prediction): $16,000 Black & Scholes probability: 9%
CZ missed the mark by 35% as Bitcoin failed to break $10,500 level within four months.
This was not a lousy call, but rather way too optimistic as indicated by the Black & Scholes model.November 20, 2019: Willy Woo calls the drop to $4,500
Analyst Willy Woo reflected on the previous year cycle low of $3,100 and estimated that Bitcoin could drop 71% from its $12,800 high, reaching $4,500 before the next halving.It seemed rather unlikely at the time, but a six-month timeframe in cryptocurrency is a very long time.Bitcoin Price: $8,100 Strike (prediction): $4,500 Black & Scholes probability: 11%
Hats off to Willy Woo on this call as the March 13 infamous crash caused a brief test of the $4,000 level.Despite being correct, buying protection for such a long time frame costs substantial money.
A $6K put option would have cost Woo $540 back then.November 21, 2019: Peter Schiff predicts $1,000
Notorious Bitcoin basher Peter Schiff spotted a head and shoulders pattern and issued a $1,000 prediction.Although no timeframe was set, based on such a pattern, a three-month time frame seems reasonable.
Bitcoin Price: $7,600 Strike (prediction): $1,000 Black & Scholes probability: 0%
One doesn’t need to be a statistician to deem such predictions as unreasonable.According to the options model, a $5,000 target back would still have shown a limited 10.7% probability.
Peter could have remained bearish using a more reasonable goal, according to options markets at that time.January 17, 2020: Peter Brandt predicts $6,000
The 40-year market stalwart said that BTC had already hit its floor; hence investors waiting for a price dip to $6,000 have “missed” their opportunity.No timeline was mentioned, although a 3-month prediction would have pleased most investors.Bitcoin Price: $8,000 Strike (prediction): $6,000 Black & Scholes probability: 12%
Less than two months after that tweet, the sudden Bitcoin collapse on March 13 proved Peter Brandt’s prediction wrong.February 4, 2020: Tom Lee predicts $27,000
In an interview with Yahoo! Finance, Fundstrat senior analyst Tom Lee suggested that Bitcoin’s technical achievements paved the way for 200% gains within six months, with halving acting as a catalyst.
Bitcoin Price: $9,100 Strike (prediction): $27,000 Black & Scholes probability: 1%
With less than 20 days to fulfill such a prediction, it seems very unlikely to occur.At least buying a $23K call option would have cost $65, a bargain considering a $4,000 upside to Lee’s target.
February 10, 2020: PlanB predicts $10,000 before halving
The creator of the stock-to-flow model revealed his belief that Bitcoin would not return below $8,200.PlanB also mentioned that he was expecting levels above $10,000 near Bitcoin halving in May.Bitcoin Price: $9,850 Strike (halving prediction): $10,000 Black & Scholes probability: 49%
Less than a month later, PlanB’s $8,200 support level was broken, although his $10,000 prediction for halving was pretty close as it was off by only 3% to 5%.
One might say PlanB got it 50% right, although the bold $10,000 prediction could have earned him good money using a butterfly spread strategy.Options pricing provides guidance, but it isn’t an oracle
Black & Scholes can be a useful tool to understand how far a prediction might be from options pricing.
What’s clear is that pundits seem to exaggerate their takes, which leads to huge misses and misinformation in the form of bad analysis being spread through major media outlets.
In some cases, the wild guesses do hit the mark.For example, Willy Woo and PlanB could certainly have profited by defying options model pricing, but generally it’s better to do your own research instead of following calls from ‘leading’ analysts.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.Every investment and trading move involves risk.You should conduct your own research when making a decision.
Share this: Leaders of the Digital Dollar Project Talk Privacy and the Next Century of Money Former CFTC royalty and current leaders of a U.S.-based think tank to promote a digital dollar talk privacy in new AMA.As part of the virtual conference Consensus 2020, three leaders of the Digital Dollar Project held an AMA on May 11 in which they went at length into their thoughts for the future of… Gavin Wood: ‘Governance is Critical’ for Crypto Ecosystem Ethereum co-founder Gavin Wood spoke at the Unitize conference on July 6 regarding blockchain governance in the Polkadot project.
930 Total views 41 Total shares Gavin Wood, the co-founder of Ethereum and Parity Technologies, says crypto-economic systems act like “nation-states” of the internet, running on governance as a type of parliamentary democracy.Wood joined the Unitize… Crypto Hardware Wallet Ledger Resumes Bitcoin Cash Services Bitcoin Cash (BCH) services for cryptocurrency hardware wallet Ledger have resumed, according to an announcement published Nov.23.Ledger suspended its BCH service on Nov.14 in anticipation of the cryptocurrency’s hard fork “to prevent unwanted transactions and potential replay attacks.” During the service pause it was not possible to send BCH through the wallet’s infrastructure.The… Chinese Courts Use Blockchain for Property E-Sealing Courts in China are rolling out blockchain-based electronic seals to protect property from being disturbed or damaged.1186 Total views 49 Total shares Several courts in China have implemented blockchain technology as a way to secure properties with an electronic seal.The Executive Bureau of the People’s Court in Haidian District, Beijing, has reportedly deployed a… US SEC’s Hester Peirce: Certain Tokens Need a Safe Harbor U.S.Securities and Exchange Commission (SEC) commissioner Hester Peirce expressed interest in building a non-exclusive safe harbor for token offerings.
The news was reported by Singaporean blockchain business consulting firm Jenga BCG in a press release published on Aug.5.Per the document, Pierce made her remarks during the Convergence Forum held at the Singapore University… Bitcoin Falls Near $9,000 as US Stock Market Sees Gains Tuesday, June 18 — most of the top 20 cryptocurrencies are reporting moderate losses on the day by press time, as bitcoin (BTC) falls Near $9,000 mark again.Market visualization courtesy of Coin360Bitcoin is currently down about 3% on the day, trading around $9,045 at press time, according to Coin360.Looking at its weekly chart, the coin… After MIT Find Vulnerabilities, Medici Ventures Defends Blockchain Voting App Voatz Jonathan Johnson, CEO of Overstock and president of Medici Ventures, has issued a statement supporting blockchain in voting in response to the technology’s vulnerabilities claims published on Feb.13.Emerging technologies got in the crosshairs of regulators when a mobile software application that had been devised to help calculate the total number of votes in the… Icon to Giveaway $570,000 in Tokens to Promote Voting, Decentralization The Icon Foundation, the group behind the Icon blockchain network, is giving away 3 million ICX tokens — worth ~$570,000 — in anticipation of its upcoming Public Representative (P-Rep) elections.
The giveaway will last from August 26 to September 24 for IXC token holders who opt to participate in P-Rep voting.Icon shared news of the… Bank of America: Blockchain Market Could Hit $7 Bln, Will Give Boost to Amazon, Microsoft The Bank of America (BoA) has estimated that blockchain could be a $7 billion market and provide a major boost to corporate giants such as Microsoft and Amazon, CNBC reports Oct.2.While BoA’s analysts refrained from putting “a time stamp” on the industry becoming a major, multi-billion dollar addressable market, they reportedly based their estimates… Leave a Reply You must be logged in to post a comment.Search.
