Bitcoin’s options market is assigning a low probability of prices rising above $100,000 this year despite widespread expectations for a meteoric rally in the wake of Tesla’s recent purchase of the top cryptocurrency.
At press time, the options market is pricing 12% odds of the cryptocurrency trading in seven figures before the end of December, according to data source Skew. The probability of a break above $70,000 is around 21%.
“With the extreme volatility of the past two months, the market isn’t showing a lot of conviction on how bitcoin will trade for the rest of the year,” Sui Chung, CEO of CF Benchmarks, told CoinDesk.
Option probabilities are calculated using the Black-Scholes formula based on critical metrics such as call options’ prices, strike prices, the price of the underlying asset, and the “risk-free” interest rate on investments as U.S. Treasurys and the time to maturation.
Options are derivative contracts that give the purchaser the right, but not the obligation, to buy the underlying asset at a predetermined price on or before a specific date. A call option represents a right to buy, and a put option gives the right to sell.
One may argue that the options market is underpricing prospects of a strong rally, given that Tesla’s bitcoin purchases have bolstered bullish expectations.
“Prices can fly very high, I expect other heavyweights to follow suit,” trader and analyst Alex Kruger told CoinDesk, referring to Tesla’s (TSLA) bitcoin $1.5 billion bitcoin investment made earlier this year.
Further, if history is a guide, the cryptocurrency looks primed for a big move this year, having undergone its third reward halving or programmed 50% cut in daily issuance in 2020.
In the past, bitcoin has scored staggering gains in the year following the halving year. The cryptocurrency underwent its first and second halving in 2012 and 2016, respectively, and prices rallied by 5,000% and 1,300% in 2013 and 2017.
As of now, the options market doesn’t appear to be concerned with history repeating itself. The market focus has turned to other large-cap coins, according to Chung.
“Positioning is very bullish in the ETHUSD futures on Crypto Facilities with February contracts trading at 2.6% premium to spot vs. 1.7% premium in bitcoin futures,” Chung said. “This is driven by new avenues to gain exposure, such as the newly launched CME Ether futures, which saw more than $30 million traded on day one.”
Also, option probabilities are not perfect indicators and merely represent traders’ expectations, which can often be wrong. The probability of prices rising above $20,000 by December 2020 stood below 10% through the first ten months of the year. However, the cryptocurrency ended up rallying as high as $39,000 by the year’s end.
Traders may begin pricing higher odds of a move to $100,000 by the end of 2121 if more corporates copy Tesla’s decision to invest in bitcoin, leading to a convincing breakout above the psychological level of $50,000.
Bitcoin is currently changing hands near $46,200, representing a 3% gain on a 24-hour basis, according to CoinDesk 20 data. The cryptocurrency is stuck in a minor descending channel on the hourly chart.
A breakout would signal a continuation of the rally from $40,000, exposing the psychological hurdle of $50,000. The cryptocurrency picked up a strong bid earlier this week on the back of Tesla news and clocked record highs above $48,000.