Abstract
In this work we examine the largest 100 cryptocurrency return series ranging from 2015 to early 2018. We concentrate our analysis on daily returns and find several interesting stylized facts. First, principal components analysis reveals a complex return generating process. As we examine our data in the most recent year, we find that surprisingly more than one principal component appears to explain the cross-sectional variation in returns. Second, similar to hedge fund returns, cryptocurrency returns suffer from the “beta-in-the-tails” hidden risk. Third, we find that predicting cryptocurrency movements with machine learning and artificial intelligence algorithms is marginally attractive with variation in predictability power per cryptocurrency. Fourth, lower volatile cryptocurrencies are slightly more predictable than more volatile ones. Fifth, evidence exists that efficacy of distinct information sets varies across machine learning algorithms, showing that predictability may be much more complex given a set of machine learning algorithms. Finally, short-term predictability is very tenuous, which suggests that near-term cryptocurrency markets are semi-strong form efficient and therefore, day trading cryptocurrencies may be very challenging. Keywords: cryptocurrency, blockchain, machine learning, bitcoin, beta-in-the-tails, risks
Highlights
Cryptocurrency is a digital asset designed to work as a store of value and a medium of exchange1
Returns reveal that in some period there exists a single dominant component in the most recent prior year there appears to be two components that help explain the variation of the cryptocurrency returns
To reveal the potentially useful information sources in predicting Bitcoin prices, we categorize all variables into 10 information sets: 1) price returns, 2) price momentum, 3) rolling volatility, 4) volume, 5) S&P 500, 6) Developed equity market, 7) Emerging equity market, 8) commodity, 9) market capitalization weighted returns of cryptocurrencies, and 10) the 30-day rolling correlation of the overall cryptocurrency market
Summary
Cryptocurrency is a digital asset designed to work as a store of value and a medium of exchange. As of February 28th, 2018, the total market capitalization of the cryptocurrency market stood at $448 billion and consists of 1,524 types of currencies. Amongst the many controversies surrounding cryptocurrencies, a popular topic of debate is whether it should be classified as a commodity, investment, property, currency or digital currency. Bitcoin puts cryptocurrencies center stage in the popular press and with the recent painful pull back in early 2018, the interest in Bitcoins in particular continues to hold. As of February 28th, the price was $10,559.20
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