I'Ve Simulated The Bitcoin Price For The Whole 2018

01/02/2018 I’ve simulated the bitcoin price for the whole 2018. You won’t believe the result!
Xoel López Barata Follow

Jan 22 · 6 min read
I’ve simulated the bitcoin price for the

whole 2018. You won’t believe the result!
Disclaimer: This is just for fun, my opinion and not investment advice.
Do your due diligence, don’t do stupid things and don’t hold more USD
than you can a ord to lose.
Disclaimer 2: Some of you have pointed out that there is no guarantee

that the future returns will be like past returns; past performance
doesn’t indicate future performance. I know. Have I already mentioned
this is just for fun? Don’t take this that seriously; if I wanted to write
rigorous science, I’d go and publish a paper, not a Medium post with
gifs and memes. Relax! :)
Anyway, in the particular case of Bitcoin, I believe it is sound money,

while at money is not. So if you think sound and uncensorable money
is important to enough people, that could be a reason for the future
returns being similar to the past ones, until a majority of the
population realizes Bitcoin is better money.
. . .
Now that you’re here after that clickbaity headline, let’s play a little
with some numbers.
Don’t worry, this’ll be only a ~5 minute adventure.
Here I’m doing a simple Monte Carlo simulation on the daily returns
of the USD bitcoin price to try to know what will be its most likely
https://medium.com/@xoelop/weve-simulated-the-bitcoin-price-for-the-whole-2018-you-won-t-believe-the-result-4a602679dac2 1/8
price by the end of 2018. You can see the whole code used to create
this in my GitHub.
Daily returns? What’s that?
The return is a computation of how much a price has varied from one
observation to the next one. In this case, as we’re taking daily data,
the returns will be daily. And how are they calculated? There are
several forms. Here, the simplest one will be enough:
In an ideal world, the daily returns of nancial assets would come

from a normal distribution, but the reality far from that, and the
actual daily returns have fatter tails. What does this mean? It means
that extreme events have a higher probability of happening than a
normal distribution would predict, and the distributions are not
alike, as you can see below.
Here you can’t tell the di erence between the tails but believe me, the ones from the returns
distribution are fatter.
Ok, but what is a Monte Carlo simulation?
According to Wikipedia, Monte Carlo methods (or Monte Carlo

e xperiments) are a broad class of computational algorithms that rely
on repeated random sampling to obtain numerical results.
Basically, in a Monte Carlo simulation in nance we assume that the

future behavior of the price of an asset will be similar to its past
behavior, and we generate a lot of random versions of that future,
called random walks, similar to the past. That’s done taking random
samples from the past and stacking them together to build each one
of those random walks.
The assumption that the future will be similar to the past is a daring one and it may not be true, but
it’s all we have and I guess it’s better than nothing ¯\_(ツ)_/¯ (source)
A Monte Carlo simulation on the BTC/USD

price during 2018
To build each of the random walks in our simulation, we’ll take
random samples from the daily returns from 2010 to today, add one
to each one of the samples and and multiply them cumulatively until
Dec 31, 2018. Then we multiply the current price of bitcoin times the
values of the random walk to get the simulated future prices. This
will be done a lot of times (100,000 in this case) and at the end of the
year we will see the distribution of nal price for each random walk.
Random walks
The rst 200 random walks look like this:
Linear plot of 200 of the 100,000 random walks
This upper plot tells us little information, as the exponential growth

of some of the random walks made the y-scale of the plot big, while
the majority of the random walks ended orders of magnitude below
that blue random walk. Here, a logarithmic scale for the vertical axis
would help us see what’s going on better:
Logarithmic plot of the 200 random walks shown before
Final price distributions

As we can see, the ending price for most of the random walks is
between $10K and $100K. But only with the plot from above we can’t
say much more than that. Now it’d be nice to see a histogram showing
the distribution of the nal prices for all of the 100,000 random
walks we’ve generated before. This is it:
Again, we’re facing the same problem as before, and we can’t draw
any kind of conclusions from that plot. The solution is the same:
plotting the data using a logarithmic scale for the horizontal axis. This
way, the plot looks much better:
It looks like the most likely price is somewhere between $24K and
$90K. To nd that price more precisely, we could do several things.
One of them is simply calculating the 50% percentile of the
distribution of nal prices: $ 58843. Another one is estimating the
probability density function with Kernel Density Estimation and
nding the price corresponding to the maximum of that function.
The result of this is shown below:
As you see, the estimations for the most likely price are similar, and
both above $50K.
It’s important to note that this estimation doesn’t have to be taken to

the letter and it’s better used as a way to nd con dence intervals on
where the future distribution where be. In this case an 80%
con dence interval for the price of bitcoin would be between
$13,200 and $271,277. Another way to look at this is that the chance
that the price at the end of the year will be below 13,200 is the same
as that of it being above $271,277 (if the price moves in the future
similarly to how it did the past).
What else?
Now that we have the KDE density function, we could, for example,
compute the probability that the price by the end of the year will be
below a certain level.
In particular, if we want to calculate the probability that that price

will be equal or lower than today’s (Jan 20th 2018), we’d just have to
integrate the shadowed area in the following plot:
And what’s that probability? 9.84%.
‘I never thought that probability was so low!’, his last words were.
. . .
Bonus tip
Yeah, I know. Nothing can keep going up forever, and the fact that it
did in the past doesn’t mean it’ll do in the future. Below there’s a
chart of another thing that has also gone up a lot in the past.
The monetary base is the most liquid part of USA money supply. It includes notes, coinage and bank
deposits.
And you, do you believe the USA can keep printing money out of thin
air forever?
. . .
That’s all folks!

Liked this?
Follow me on Twitter for more stu like this.
See the Jupyter Notebook that created this in my GitHub account.
Have fun! :)

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01/02/2018 I’ve simulated the bitcoin price for the whole 2018. You won’t believe the result!

Xoel López Barata Follow

I’ve simulated the bitcoin price for the

Disclaimer 2: Some of you have pointed out that there is no guarantee

Anyway, in the particular case of Bitcoin, I believe it is sound money,

Don’t worry, this’ll be only a ~5 minute adventure.

Daily returns? What’s that?

In an ideal world, the daily returns of nancial assets would come

Ok, but what is a Monte Carlo simulation?

According to Wikipedia, Monte Carlo methods (or Monte Carlo

Basically, in a Monte Carlo simulation in nance we assume that the

A Monte Carlo simulation on the BTC/USD

Linear plot of 200 of the 100,000 random walks

This upper plot tells us little information, as the exponential growth

Logarithmic plot of the 200 random walks shown before

Final price distributions

It’s important to note that this estimation doesn’t have to be taken to

In particular, if we want to calculate the probability that that price

And what’s that probability? 9.84%.

That’s all folks!

Follow me on Twitter for more stu like this.

See the Jupyter Notebook that created this in my GitHub account.

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