What drives bitcoin? An approach from continuous local transfer entropy and deep learning classification models

TL;DR

This paper investigates the factors influencing Bitcoin's price movements by combining continuous transfer entropy for feature selection with deep learning classification, revealing that Bitcoin can autoregulate during high volatility periods.

Contribution

It introduces a novel methodology combining transfer entropy-based feature selection with deep learning to predict Bitcoin price direction, highlighting the autoregulation phenomenon during volatile periods.

Findings

Significant drivers vary during pandemic and post-pandemic periods.

Bitcoin's price prediction accuracy improves without external drivers during high volatility.

The methodology excludes traditional market indices as drivers during certain periods.

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 methodology excludes the NASDAQ index and Tesla as drivers. 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 autoregulate and does not need additional drivers to improve the accuracy of the price direction.