Your Sentiment Matters: A Machine Learning Approach for Predicting Regime Changes in the Cryptocurrency Market

José Parra Moyano, Daniel Partida, Moritz Gessl

Research output: Chapter in Book/Report/Conference proceedingArticle in proceedingsResearchpeer-review

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Abstract

Research suggests that a significant number of those investing in cryptocurrencies do not follow what we might call rational, profit-maximizing behavior. We also know that with the progressive lowering of entry barriers to online trading platforms, an increasing number of inexperienced investors are investing in cryptocurrencies. Increasingly, the behavior of investors contradicts the predictions made by traditional financial models and challenges the assumptions on which such models have previously relied when anticipating returns on cryptocurrency investments. To overcome this issue we develop a random forest model which we train with features stemming from a sentiment analysis performed on data generated by cryptocurrency enthusiasts using Twitter, Google Trends, and Reddit. Our findings show that such features have an important role to play in capturing the behavior of cryptocurrency investors and increase our model’s ability to anticipate regime changes in the cryptocurrency market. Our model outperforms the predictive ability of the Log-Periodic Power Law model—currently, the model most widely-used to predict regime changes in financial markets. These results imply that scholars and practitioners aiming to understand and predict the development of cryptocurrency markets stand to benefit from analyzing social media data generated by cryptocurrency enthusiasts.
Original languageEnglish
Title of host publicationProceedings of the 56th Annual Hawaii International Conference on System Sciences
Number of pages10
Place of PublicationHonolulu
PublisherHawaii International Conference on System Sciences (HICSS)
Publication date2023
Publication statusPublished - 2023
EventThe 56th Hawaii International Conference on System Sciences. HICSS 2023 - Lahaina, United States
Duration: 3 Jan 20236 Jan 2023
Conference number: 56
https://hicss.hawaii.edu/

Conference

ConferenceThe 56th Hawaii International Conference on System Sciences. HICSS 2023
Number56
Country/TerritoryUnited States
CityLahaina
Period03/01/202306/01/2023
Internet address
SeriesProceedings of the Annual Hawaii International Conference on System Sciences
ISSN1060-3425

Keywords

  • Bitcoin
  • Cryptocurrencies
  • LPPL
  • Machine learning
  • Sentiment analysis

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