What Drives Bitcoin? An Approach from Continuous Local Transfer Entropy and Deep Learning Classification Models.

Andrés García-Medina,Toan Luu Duc Huynh

doi:10.3390/e23121582

Abstract

Bitcoin has attracted attention from different market participants due to unpredictable price patterns. Sometimes, the price has exhibited big jumps. Bitcoin prices have also had extreme, unexpected crashes. We test the predictive power of a wide range of determinants on bitcoins’ price direction under the continuous transfer entropy approach as a feature selection criterion. Accordingly, the statistically significant assets in the sense of permutation test on the nearest neighbour estimation of local transfer entropy are used as features or explanatory variables in a deep learning classification model to predict the price direction of bitcoin. The proposed variable selection do not find significative the explanatory power of NASDAQ and Tesla. Under different scenarios and metrics, the best results are obtained using the significant drivers during the pandemic as validation. In the test, the accuracy increased in the post-pandemic scenario of July 2020 to January 2021 without drivers. In other words, our results indicate that in times of high volatility, Bitcoin seems to self-regulate and does not need additional drivers to improve the accuracy of the price direction.

Highlights

There is tremendous interest in determining the dynamics and direction of the price of Bitcoin due to its unique characteristics, such as its decentralization, transparency, anonymity, and speed in carrying out international transactions
The variable selection procedure consisted of applying the continuous transfer entropy from each driver to Bitcoin using the KSG estimation
We start from descriptive statistics as a first approach to intuitively grasp the complex nature of Bitcoin, as well as its proposed heterogeneous drivers

Summary

Introduction

There is tremendous interest in determining the dynamics and direction of the price of Bitcoin due to its unique characteristics, such as its decentralization, transparency, anonymity, and speed in carrying out international transactions. These characteristics have attracted the attention of both institutional and retail investors. Unlike fiat money, Bitcoin cannot be arbitrarily issued, so its value is not affected by the excessive issuance of currency that central banks currently follow, or by low interest rates as a strategy to control inflation. It has been recently suggested that bitcoin is a safe-haven asset or store of value, having a role similar to that once played by gold and other metals

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Conclusion