Quant explains how to price Bitcoin

Summary

In this video, a former Wall Street options market maker and quantitative researcher debunks common misconceptions surrounding Bitcoin and other crypto assets. He emphasizes that no one can accurately predict the future price of Bitcoin and warns against misleading claims from online grifters. The video explains how the best market information comes from the options market, which reflects the true sentiment of the most informed and financially powerful players. The presenter encourages viewers to focus on market data, rather than speculative opinions, to understand the volatile nature of crypto assets.

Takeaways

• 😀 Nobody can predict the future price of Bitcoin with certainty, and anyone who claims they can is likely lying or trying to sell you something.
• 😀 The best information about the value of Bitcoin or any crypto asset is found in the market itself, particularly in the options market.
• 😀 The price of Bitcoin, like other assets, is determined by supply and demand, with deep-pocketed players driving the market price.
• 😀 Options markets contain more layers of information that help understand the underlying asset class, such as Bitcoin, better.
• 😀 The volatility smile for Bitcoin is U-shaped, indicating fear of both significant upside and downside movements, highlighting the market's uncertainty.
• 😀 The implied volatility in Bitcoin is high, signaling that the market sees it as a very risky asset class with the potential for extreme price changes.
• 😀 Just like the election betting odds predict outcomes better than polls, the options market is a more reliable source of information about the future price of Bitcoin.
• 😀 Financial markets are inherently uncertain. If there were certainty about the future price of an asset, the price would adjust immediately to that information.
• 😀 Relying on social media grifters and unsolicited newsletters for financial advice is unwise, as they often prey on people who lack a deep understanding of financial markets.
• 😀 To understand what an asset is worth, follow the money in the options markets, where the most informed players are likely dictating the price.
• 😀 Both bullish and bearish arguments exist for Bitcoin, and it's uncertain whether it will become the dominant digital asset or if it will be replaced by something else, like Litecoin.

Q & A

What is the main message the speaker is trying to convey in the video?

The speaker emphasizes that nobody can predict the future price of Bitcoin with certainty. He warns against those who claim to know the future price, suggesting that these individuals are often misleading or trying to sell something. Instead, he advocates for understanding the true value of Bitcoin and other crypto assets by analyzing market data, particularly the options market.

Why does the speaker suggest that if someone confidently predicts the price of Bitcoin, they are likely lying?

The speaker argues that if anyone truly knew where the price of Bitcoin would go in the future, the information would immediately be reflected in the market price. Since the market doesn't instantly react in such a way, it implies that predictions about the price are speculative, not based on certainty.

How does the speaker describe the difference between the pricing mechanisms of stocks and Bitcoin?

The speaker compares Bitcoin’s price dynamics to stocks, noting that while stock prices can be influenced by factors like dividends, Bitcoin does not have such mechanisms. The key difference lies in Bitcoin’s market being speculative, with a highly uncertain future price, whereas stocks have established mechanisms that can determine their value more predictably.

What is a volatility smile, and how does it relate to the S&P 500 and commodities?

A volatility smile is a graphical representation of implied volatility across various strike prices. For the S&P 500, the volatility smile is described as a 'Nike check' shape, with higher implied volatility for puts due to the potential for negative market shocks. In commodities like crude oil, the volatility smile is shaped like a 'smirk,' reflecting the higher risk of price increases (upside risks) due to events like geopolitical tensions. The speaker uses this to show how different asset classes react to volatility.

What is unique about Bitcoin's volatility smile compared to other asset classes?

Bitcoin’s volatility smile is symmetric (U-shaped), indicating that the market perceives both upward and downward risks as highly uncertain. This suggests that Bitcoin has the potential for extreme movements in either direction, reflecting the market’s overall uncertainty about its future price.

What role do options markets play in determining the price and volatility of Bitcoin?

The options market offers critical insights into Bitcoin’s price dynamics by revealing implied volatility and the market’s perception of future risk. Investors with the most capital influence these prices, reflecting the true level of uncertainty in Bitcoin’s future price movements.

Why does the speaker emphasize following the money, rather than listening to predictions from social media or newsletters?

The speaker suggests that the most reliable information comes from understanding the actions of those with the most capital, as they influence market prices. Social media grifters often exploit people’s lack of understanding of markets, whereas tracking market data—such as from the options market—provides a clearer picture of where the market believes prices will go.

How does the speaker explain the concept of 'markets being inherently uncertain'?

The speaker explains that if there were consensus on where an asset's price would go, the market would adjust to that price immediately. The fact that markets are constantly fluctuating indicates that there is no clear certainty about future prices, which is a fundamental characteristic of financial markets.

What does the speaker mean by 'the richest people in the world push the market prices'?

The speaker is highlighting that those with the largest financial resources, such as institutional investors or whales, have the greatest ability to influence market prices. Their actions are often a reflection of the best available information, making their decisions an essential indicator for understanding asset values.

What does the speaker say about Bitcoin being 'digital gold' and the argument that other cryptocurrencies could serve the same purpose?

The speaker acknowledges the 'digital gold' argument for Bitcoin, where people view it as a store of value against inflation and economic instability. However, he also challenges the assumption that Bitcoin is the only cryptocurrency with value, pointing out that other cryptocurrencies like Litecoin could potentially fill the same role, suggesting that being the first mover does not guarantee long-term success.