With the smell of fireworks still lingering in the air i computed the 2015 outlook with entropic methods used in modern finance. The concept of entropic analysis of equity prices is old and it was first proposed by Louis Bachelier in his “theory of speculation”, this thesis anticipated many of the mathematical discoveries made later by Wiener and Markov underlying the importance of these ideas in today’s financial markets. Then in the mid 1940’s we have had the information theory developed by Claude Shannon , theory that is applicable to the analysis and optimization of speculative endeavors and it is exactly what i’ve done just applied to bitcoin/usd ratio, especially using the Shannon Probability or entropy that in terms of information theory, entropy is considered to be a measure of the uncertainty in a message.
To put it intuitively, suppose , at this probability, the event is certain never to occur, and so there is no uncertainty at all, leading to an entropy of 0; at the same time if the result is again certain, so the entropy is 0 here as well. When or 0.50 the uncertainty is at a maximum or basically there is no information and only noise.
Applying this entropy concept to an equity like a stock or a commodity or even bitcoin itself common values for P are 0.52 that can be interpreted as a slightly persistence or tendency to go up, this means that for example stock markets aren’t totally random and up to some extend they are exploitable, same for btc.
Knowing the entropy level of bitcoin/usd is crucial if we want to compute its main quantitative characteristics, as i explained in the technical background of my blog this process is quickly doable once you have all the formulas.
|BTC/USD||US Stock Market||Gold|
|Growth Factor G||1.000553||1.000198||1.000120|
|Shannon Probability P||0.518||0.510||0.508|
|Root mean square RMS (or volatility factor)||0.056||0.022||0.009|
As comparison i included in the above table a commodity and the american stock market, you can quickly see that bitcoin is much better then them in terms of growth, also the entropy is lower (because P is higher) the only negative aspect is the volatility that is much higher nevertheless the growth factor of btc/usd remains pretty high and once volatility decreases it will improve even more.
At this point with those quantitative parameters we can quickly compute a price forecast for 2015 just taking the growth factor G to the power of 365 (365 samples for 1y) and multiplying it for the initial price, at the moment is 315$, so we have:
Target price for 2015 = price * G^365 = 315*1.000553^365=383$ or 26% expected growth, but because of a rampant volatility there will be for sure strong price fluctuations above and/or below 383$.
|2015 Price forecast||Full volatility||Half volatility|
|Forecast using only G||383$||383$|
|Upper bound adding volatility||1136$||660$|
|Lower bound subtracting volatility||130$||220$|
I included in the table also a forecast using an halved value for volatility, it is interesting to see that with reduced volatility i don’t expect to see prices below 220$, a well know support value for who follow regularly my blog and chat, I expect from buyers a strong buying activity in the low 200$ for all 2015 if the opportunity arise.
The price target in case of a new bubble is unchanged and it is the same i was forecasting last year, roughly 3300$ but don’t get excited too quickly:) there is only a chance of 5% to go there in 2015.
As usual i’m available to questions if more explanations are needed or if you want to obtain more details of these computations (formulas used etc..).