Understanding Rate of Return Dynamics of Cryptocurrencies: An Experimental Campaign

In recent years, cryptocurrencies have been considered as an asset by public investors and received much research attention. It is a volatile asset, thus predicting its prices is not easy due to the dependence on multiple external factors. Machine learning models are becoming popular for cryptocurrency price predictions, while also considering social media data. In this article, we analyze the rate of return of three cryptocurrencies (Bitcoin, Ether, Binance) from an investor point of view. We also consider three traditional external variables: S&P 500 stock market index, gold price, and volatility index. The rate of return prediction is based on three stages. First, we analyze the correlation between the cryptocurrency returns and the traditional external variables. Next, we focus on the influential social media variables (from Twitter, Reddit, and Wikipedia). Later, we use these variables to improve prediction accuracy. Third, we test how the standard time series models (such as ARIMA and SARIMA) and four machine learning models (such as RNN, LSTM, GRU and Bi-LSTM) predict one-day rate of return. Finally, we also analyze the risk of investing in each cryptocurrencies using value risk statistics. Overall, our result shows no correlation between cryptocurrency returns and three traditional external variables. Second, we found that overall LSTM model is the best, GRU is the second-best prediction model, while the impact of the social media variables varies depending on the cryptocurrencies. Finally, we also found that investment in gold offers better returns than cryptocurrency during Covid-19-like situations.