GITHUB: https://github.com/howardwong97/AI-Hack-2021-Team-21-Submission

Volatility

From recent events and research papers, it is evident that the volatility of Bitcoin prices is extreme, almost 10 times higher than the volatility of major exchange rates. Hence, this excess volatility has significant implications on the usage of Bitcoin: as a currency, diversifier, hedge and/or store of value. Bitcoin's market value reached USD 1 trillion this past weekend and its price pushed past USD 56000. Within the last 2 years, the prices of cryptocurrencies have vigorously fluctated and although many have had significant rate of returns, there are also just as many, if not more, who have suffered huge losses. This is due to the extreme volatility of cryptocurrency prices and hence it has become increasingly important and relevant to better understand and model the highly volatile and unstable environment that is the crytocurrency market.

The latest 30-day estimate of the Bitcoin Volatilty index is 4.83% and the latest 60-day estimate is 5.07%. There are multiple reasons that contribute to the high volatility: low liquditiy market easily susceptible to sudden and aggressive fluctuations in prices , young market and lack of regulation due to the complexity and difficulty in regulating an open-source, decentralized technology. Hence, the values of cryptocurrencies is mostly driven by speculation since it is extremely difficult to employ traditional fundamental analysis to determine its underlying value.

Social Media

Because the cryptocurrency market is mostly driven by speculation, social media makes a significant impact. Reddit users, in particular, have been very vocal on subreddits such as wallstreetbets (GME!!) and cyrtocurrency. With the rise in retail investors trading platforms such as Robinhood amid the pandemic, there has been a significant increase in market engavement by retail investors, especially among younger populations. Hence, the impact of retail investors and their activity on social media should not be underestimated.

As mentioned before, the values of cryptocurrency is heavily dependent on speculation. Dogecoin is a prime example of the power of memes and social media in determining its value. Born out of a meme, the relationship between social media hype and Dogecoin price action is likely to be correlated.

Goals of Study

1. Investigate the effectiveness of traditional time series models in predicting volatility of cryptocurrency returns
2. Investigate the effect of sentiment analysis of Reddit Comments and Posts to improve the predictability of the model

In this study, we focused on the investigation into btc/usd on the cbse exchange due to time constraints. The same analysis can be conducted on other cryptocurrency pairs traded on other major exchange places.

Built With

• jupyter
• python