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 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 financial 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.
Read the rest here.