Predicting bitcoin returns using high-dimensional technical indicators

Abstract

There has been much debate about whether returns on financial assets, such as stock returns or commodity returns, are predictable; however, few studies have investigated cryptocurrency return predictability. In this article we examine whether bitcoin returns are predictable by a large set of bitcoin price-based technical indicators. Specifically, we construct a classification tree-based model for return prediction using 124 technical indicators. We provide evidence that the proposed model has strong out-of-sample predictive power for narrow ranges of daily returns on bitcoin. This finding indicates that using big data and technical analysis can help predict bitcoin returns that are hardly driven by fundamentals. Keywords: Bitcoin return prediction, High-dimensional classification, Decision tree classification, CART, Cryptocurrency, Bitcoin, Technical indicators