Since the price of Bitcoin (BTC) surged over $ 19,000 in 2017, cryptoanalysts have released an incredibly wide range of price predictions about the date and value of the next all-time high or low.
Sometimes these predictions are based on a deep fundamental and technical analysis, while other times they are fair spontaneous estimates at will.
Options markets provide information Useful for traders’ expectations, including the mathematical probabilities of an asset’s future prices. Use the model Black Scholes allows a better rating the likelihood of analyst estimates.
Black Scholes evaluation algorithm It has been the basis for pricing traditional wealth options since the early 1970s and is still widely used.
Although the Black Scholes option pricing model tends to underestimate the likelihood of significant movement, provides accurate and conservative estimates.
Similar to the weather forecast, Adding more than a few days to an estimate reduces its accuracy by a logarithmic ratio. It should also be borne in mind that the model has to predict a binary result because an option of USD 9,500 It is considered useless if the expiry price is USD 9,499.
Expert price predictions are often wrong
Many analysts tend to overdo their estimates make a bold statement and get media attention, or their predictions are based on different types of prejudices.
Nobody expects gold fanatics like that Peter Schiff draws a bullish estimate of Bitcoin, and the same goes for the expectation of a bearish prediction from the model’s author. Stock-to-Flow, PlanB.
The question that investors should ask is precise How far were these estimates compared to Bitcoin option prices? Also, Should one even take into account the opinions of these analysts and experts?
Consider mathematical probability options
Although Black Scholes’ option pricing model can be complicated, its use is fairly simple. By specifying the current BTC price, the exercise level, the remaining terms and the annual volatility, the model immediately delivers the quotas above and below a certain price.
Skipping complex calculations, One can consult Skew Analytics to find the current odds for each process based on option prices.
Bitcoin probability of options expiring. Source: Deribit
Most active options They expire on the last Friday of every month. As previously explained These numbers will appear conservative. Both the August and September goals They just mean a 50% chance that the Bitcoin price will stay above $ 9,000.
A factor of 50% is effectively neutral, since the mathematical model determines that the probabilities above and below this goal are more or less the same.
Vice versa, The probability of $ 8,500 when it is due in July (in just two weeks) is 76%. The model it becomes safer as we approach maturity So you shouldn’t expect any options A 90% more likely price for contracts with a remaining term of more than two weeks.
Experts’ predictions are often unreasonable
To claim whether analysts and experts forecast outperform option market prices, these probabilities must be stacked against the Black Scholes option model, which requires four basic inputs: current price, target (forecast) days to maturity, and implied volatility.
Bitcoin price and expert predictions. Source: TradingView
The table above shows six forecasts over a period of 100 days, which are tested individually the option market model.
November 1, 2019: Changpeng Zhao predicts $ 16,000
Although he has said several times that he is not an active trader, the founder of Binance, Changpeng Zhao, frequently He likes to publish his predictions. CZ announced this in early November BTC will soon reach $ 16K so you should need four months.
- Bitcoin price: $ 9,130
- Implied volatility: 74%
- Days to maturity: 120
- Target (forecast): $ 16,000
- Black Scholes probability: 9%
CZ lost the brand by 35% since Bitcoin couldn’t break the $ 10,500 level in four months. This was not a bad decision, but it was too optimistic, as the Black Scholes model shows.
November 20, 2019: Willy Woo predicts a downward trend to $ 4,500
Analyst Willy Woo pondered last year’s $ 3,100 cycle low and estimated that Bitcoin could drop 71% from its $ 12,800 high and hit $ 4,500 before the next cut in half. It seemed pretty unlikely at the time, but a six-month deadline for cryptocurrency is a long time.
- Bitcoin price: $ 8,100
- Implied volatility: 72%
- Days to expire: 170
- Target (forecast): $ 4,500
- Black Scholes probability: 11%
Congratulations to Willy Woo on this call as the infamous March 13 crash caused a quick test of the $ 4,000 level. Despite the accuracy, buying protection over such a long period of time costs a lot of money. A put option Back then $ 6K would have cost Woo $ 540.
November 21, 2019: Peter Schiff predicts $ 1,000
Peter Schiff, the famous Bitcoin critic, He saw a head and shoulder pattern and issued a $ 1,000 prediction. Although no timeframe has been established based on this pattern, a timeframe of three months seems appropriate.
- Bitcoin price: $ 7,600
- Implied volatility: 68%
- Days to expire: 90
- Target (forecast): $ 1,000
- Black Scholes probability: 0%
You don’t have to be a statistician to consider such predictions as irrational. Depending on the option model a target of USD 5,000 back would have shown another Limited probability of 10.7%.
Peter could have continued to be bearish with a more reasonable goal, according to the option markets at that time.
January 17, 2020: Peter Brandt predicts $ 6,000
The 40-year-old market leader said BTC has already bottomed out. As a result, investors who expect the price to drop to $ 6,000 have “missed” their opportunity. No schedule was mentioned, although a 3-month forecast would have pleased most investors.
- Bitcoin price: USD 8,000
- Implied volatility: 68%
- Days to expire: 90
- Target (forecast): $ 6,000
- Black Scholes probability: 12%
Less than two months after this tweet, the sudden collapse of Bitcoin on March 13 proved that Peter Brandt’s prediction was wrong.
February 4, 2020: Tom Lee predicts $ 27,000
In an interview with Yahoo! Finance, Senior Analyst at Fundstrat, Tom Lee, suggested that Bitcoin’s technical achievements paved the way for a 200% profit in six months. with halving as a catalyst.
- Bitcoin price: $ 9,100
- Implied volatility: 67%
- Days to maturity: 180
- Target (forecast): $ 27,000
- Black Scholes probability: 1%
With less than 20 days to meet such a prediction, it is highly unlikely to happen. Buy at least one call option $ 23,000 would have cost $ 65 a bargain taking into account an advantage of $ 4,000 for Lee’s goal.
February 10, 2020: PlanB forecasts $ 10,000 before halving
The creator of the stock-to-flow model announced his belief that Bitcoin would not return below $ 8,200. PlanB also mentioned that it was higher than expected USD 10,000 near Bitcoin halved in May.
- Bitcoin price: $ 9,850
- Implied volatility: 65%
- Days to expire: 90
- Target (lower forecast): $ 8,200
- Black Scholes probability: 28%
- Target (halve forecast): $ 10,000
- Black Scholes probability: 49%
Less than a month later PlanB’s $ 8,200 support level was broken, although the $ 10,000 forecast for halving was pretty close as it only fell 3% to 5%.
You could say that PlanB was 50% correct although the bold prediction of USD 10,000 could have earned him good money with a butterfly spreading strategy.
Option prices offer orientation, but are not an oracle
Black Scholes can be a useful tool to understand the extent to which option prices can be predicted. It is clear that the experts they seem to exaggerate their opinions what leads big mistakes and wrong information in the form of bad analyzes that are spread through the mainstream media.
In some cases, wild guesses hit the mark. For example, Willy Woo and PlanB could certainly have benefited from challenging pricing for option models, but overall it is better to do your own research than to follow the predictions of “top” analysts.
The views and opinions expressed here are solely those of author and do not necessarily reflect Cointelegraph’s views. Every step of investment and trading involves risks. You have to do your own research when making a decision.