Bitcoin has been on a roller coaster ride in the past few months, reaching an all-time high of $52,632 on Feb. 16, then plunging to $51,343 on Feb. 18. The volatility has been driven by a mix of factors, including institutional adoption, regulatory uncertainty, network congestion, and speculative trading.
But what does the future hold for the leading cryptocurrency? According to some crypto traders, there is a 20% chance that bitcoin will surpass $70,000 by the end of April, based on the analysis of options contracts.
Options are derivatives that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price and time. By looking at the prices and volumes of different options contracts, traders can gauge the market sentiment and expectations about the future price movements of the underlying asset.
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One way to measure the probability of a certain price level being reached is by using the delta of an option contract. Delta is a number between 0 and 1 that represents how much the option price changes in response to a change in the underlying price. For example, a delta of 0.5 means that for every $1 increase in the underlying price, the option price increases by $0.5.
A delta of 0.2 means that for every $1 increase in the underlying price, the option price increases by $0.2. This also implies that there is a 20% chance that the option will expire in the money, meaning that the underlying price will be higher than the strike price at expiration. Conversely, a delta of -0.2 means that there is a 20% chance that the option will expire out of the money, meaning that the underlying price will be lower than the strike price at expiration.
By looking at the delta of bitcoin options contracts with different strike prices and expiration dates, traders can estimate the probability of bitcoin reaching a certain price level by a certain time. For example, according to data from Skew, an analytics platform for crypto derivatives, as of March 10, the delta of a bitcoin call option with a strike price of $70,000 and an expiration date of April 30 was 0.2. This means that there is a 20% chance that bitcoin will be above $70,000 by April 30.
Of course, this is not a definitive prediction, but rather an indication of how the market is pricing in different scenarios. The actual outcome will depend on many factors that are hard to anticipate or quantify, such as supply and demand dynamics, macroeconomic events, technological innovations, and regulatory developments.
However, some traders may use this information to hedge their positions, speculate on future price movements, or create more complex strategies using combinations of different options contracts. For example, a trader who is bullish on bitcoin may buy a call option with a high strike price and a low delta, hoping to profit from a large upside move. A trader who is bearish on bitcoin may sell a call option with a low strike price and a high delta, hoping to profit from a small downside move or no move at all.
Options are one of the many tools that crypto traders can use to express their views and manage their risks in this volatile and unpredictable market. As the crypto space matures and attracts more participants, the options market is likely to grow and become more liquid and efficient, providing more opportunities and challenges for traders.
