When it comes to practically any framework not involving past results, we live in a world of probabilities. Some frameworks are relatively linear and deterministic; for example, temperature shifts amid changes in the season. Other frameworks are non-linear and probabilistic, such as the odds of getting a four-seamer on a 3-1 count in baseball. Naturally, then, there is a temptation to bid up downtrodden securities like Bit Digital (BTBT) given certain extreme scenarios.
The thinking goes like this. In everyday market situations, the median price action of a security may naturally ebb and flow within a range of ±1%. For BTBT stock specifically, the average weekly performance since March 2020 has been a positive return of 2.47%. So, the assumption is that if BTBT suffers significant volatility — such as last week’s loss of 20.24% — there’s a chance for a big rebound.
Obviously, the cryptocurrency market has truly come alive following the surprise results of the 2024 presidential election. Given that Bit Digital represents one of the growing number of blockchain mining enterprises, it’s practically inevitable that BTBT stock would attract attention among deep-value hunters. After all, both cryptos and artificial intelligence seem to offer two of the biggest narratives in the market today.
This concept of attempting to predict next moves also carries scientific parallels. Under normal market circumstances, linear and deterministic mathematical models are perfectly fine to deploy, much like airplane designers depend heavily on Newtonian mechanics. However, satellites require the use of “Einsteinian” math — general and special relativity — in part due to weaker gravitational forces and substantial orbital velocities warping the space-time continuum.
Put another way, Newtonian mechanics can’t capture the full context of what happens in space. Likewise, linear models can’t capture the context of market sentiment under cycles of extreme fear and greed. However, applying Einsteinian math, if you will, to Bit Digital’s price action reveals an unexpected dynamic.
Unusual Options Activity for BTBT Stock May be Misleading
On Monday, BTBT stock represented one of the entries in Barchart’s screener for unusual stock options volume, though perhaps not in the way the bulls would prefer. Total volume was only 17,180 contracts against an open interest reading of 422,379 contracts. The difference between Monday’s tally and the trailing one-month average metric came out to a loss of 37.12%.
However, the seemingly positive news is the breakdown of the options trades. Call volume reached 14,188 contracts against put volume of only 2,992. This pairing yielded a put/call volume ratio of 0.21, which on paper suggests more traders acquiring calls than puts. Still, this is where the framework may be somewhat misleading.
Options flow data — which focuses exclusively on big block transactions likely placed by institutional investors — shows net trade sentiment sit at $49,900 below parity, favoring the bears. In total, gross volume of bearish sentiment trades reached $-85,300, while bullish sentiment trades could only muster $35,400.
Still, bears targeting BTBT stock shouldn’t be surprising given the facts. A frequentist model of BTBT since March 2020 reveals that the security features a negative bias. Of the past 248 weeks, 104 were positive, 142 were negative and two were flat. Even if the flat weeks were stuck in the positive category, the weekly success ratio would only come out to 42.7%. It’s just that when BTBT swings higher, it does so robustly (hence the overall positive average return).
The above ratio was calculated using Newtonian math, if you’ll grant the analogy. However, when we apply a Bayesian inference model (over the aforementioned period sans last week) — or Einsteinian math — the weekly success ratio of BTBT stock following a weekly loss of 10% or worse comes out to about 46.2%. Clearly, a big drop impacts Bit Digital’s fear-greed continuum but not to an appreciably great magnitude.
What’s even more startling, if we adjust our Bayesian inference to anchor the conditional event as a weekly loss of 20% or worse, the probabilities come out as a coin toss: eight weeks up, eight weeks down. Yes, 50% odds of success is certainly an improvement over 42.7% or 46.2%. Still, even with the severest of disruptions to Bit Digital’s fear-greed continuum, the best we can hope for in terms of predictability is 50/50.
Bit Digital is Pure Speculation
Now, I hope the message I’m trying to convey is clear. I’m not suggesting that Bit Digital is a flawed enterprise or that it needs to be shorted. Rather, I’m merely stating that the facts do not support jumping on BTBT’s red ink in the hopes of scoring a quick profit.
If you look at bull call spreads that expire this Friday, Barchart offers two ideas: the 2.50/3.50 call spread and the 3.00/3.50 call spread. The highest probability of profit is the former trade at 48.1%. These odds check out because even under the most favorable of conditions — when extreme fear inspires extreme greed — the best that investors can hope for is a coin toss.
Again, that’s not saying anything fundamentally bad about BTBT stock. However, it’s objectively fair to label the investment as speculation. If Bit Digital is incapable of providing a clear directional bias given certain extreme conditions, then a wager in the security is simply a guess and not much more.
