Since the Bitcoin price (BTC) recovered to over USD 19,000 in 2017, cryptologists have issued an incredibly wide range of price predictions on the date and value of the next all-time high or low.
Sometimes these predictions are based on in-depth fundamental and technical analysis, while other times they are just makeshift estimates issued at will.
The option markets provide useful information about traders‘ expectations, including the mathematical probabilities of an asset’s future prices. The use of the Black & Scholes model allows for a better assessment of the probability of analysts‘ estimates.
The Black & Scholes valuation algorithm has been the basis for pricing traditional asset options since the early 1970s and continues to be widely used.
Although the Black & Scholes option pricing model tends to underestimate the probability of substantial movements, it provides accurate and conservative estimates.
Similar to weather forecasting, adding more than a couple of days to an estimate reduces its accuracy by a logarithmic proportion. It should also be noted that the model has to predict a binary outcome because a $9,500 option will be considered worthless if the expiry price is $9,499.
Expert price predictions are often misplaced
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 biases.
No one expects gold fans like Peter Schiff to draw a bullish estimate from Bitcoin, and the same can be said of expecting a bearish prediction from the author of the Stock-to-Flow model, PlanB.
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The question investors should ask is exactly how far those estimates were from the prices of Bitcoin options. Also, should one even consider the opinions of these analysts and experts?
Consider mathematical probability options
Although the Black & Scholes option pricing model can be complicated, it is quite simple to use. By reporting the current BTC price, exercise level, days to expiration, and annual volatility, the model will instantly provide probabilities above and below a specific price.
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Skipping the complex calculations, one can consult Skew Analytics to find the current probabilities for each expiration based on option prices.
Bitcoin probability at option expiration
Most active options expire on the last Friday of each month. As explained above, these figures will appear conservative. Both the August and September targets mean a mere 50% chance that the Bitcoin price will remain above USD 9,000.
A factor of 50% is effectively neutral, since the mathematical model states that the probabilities above and below that target are more or less the same.
BTC option traders are not betting on a fall in the Bitcoin price in the short term
In contrast, the probability of USD 8,500 in the July maturity (only two weeks from now) is 76%. The model becomes more secure as we approach maturity, so do not expect options to be 90% more likely for contracts with more than two weeks remaining.