Will Bitcoin hit $20,000 by Dec 2019?

Published by Sten Ivan on

black sholes model - hodlnaut blog

Bitcoin is trading at $11,690 at the time of writing and the Bitcoin Options Market implies that there is a 13% probability that it will be trading above $20,000 on 27th Dec 2019.

Bitcoin Options Market

An option is a contract that gives the buyer the right but not obligation to buy/sell Bitcoin at an agreed price (Strike Price).

These contracts are traded on Deribit, one of the leading trading platform for Bitcoin and Ethereum Options. (For more info on options: https://www.investopedia.com/terms/o/option.asp)

Pricing of an Option

A trader (or seller) who underwrites a Call option will price the option based on the likelihood that the trader thinks that the price will go beyond the Strike Price (In The Money — ITM) and hence causing the trader to lose money to the buyer of the option.

For this article, we will be using Deribit’s European Option contracts that are expiring on 27th Dec 2019 and also using the Black Scholes Option Pricing model to reverse-engineer N(d2) (Probability of an Option being ITM).

Deribit CALL Options Expiring 27th Dec 2019

For this, we need the following:

  1. Option Type (Call or Put Option)
  2. Current Price of Option (How much the option is being sold/traded for)
  3. Strike Price of Option
  4. Expiry Date of Option
  1. Option Type: CALL
  2. Current Price of Option: $1,166.11
  3. Strike Price of Option: $20,000
  4. Expiry Date of Option: 27/12/2019

We then input these data a Google Sheet, that we have built with the Black Scholes model and hooked it up to live Bitcoin prices (Google Finance) and will be able to see that the N(d2) of the price trading above $20,000 is roughly 13%

Probability of Price at Key Levels

Sk3w.co offers a live price chart on the probability of prices implied by options with regularly updated prices.

Screen Grab from sk3w.co

Probability of Bitcoin prices trading above different price levels:

  • $14K — 30%
  • $18K — 18%
  • $22K — 11%
  • $26K — 7%

How Do Traders Act?

How do traders make a profit using this information? If a trader expects the probability of $20K to be higher than 13%, they would buy the option for $1,166.11. Conversely, they would sell the option for $1,166.11 if they believe that the probability is lower than 13%.

Conclusion

The Bitcoin ecosystem continues to grow with the advent of the Options markets and here at Hodlnaut, we believe that it is important for every HODL-er to be educated financially on this emerging asset class.

The above models are simply extrapolations of the market expectations of the likelihood of Bitcoin hitting these price points by the end of the year.

The author or the Hodlnaut company will not be responsible for any monetary loss on trades being made as a result of this article.


Hodlnaut is a platform that provides financial services for individual investors where they earn interest on their cryptocurrencies by lending to institutions. Users can deposit their crypto assets into a Hodlnaut Interest Account and earn favorable interest rates.

Our current interest rates are 6.2% APY for BTC, 6.7% for ETH, and 8.3% for DAI, USDC, and USDT. Sign up for an account today and start earning interest on your crypto!


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