Predicting the bitcoin return direction with logistic, discriminant analysis and machine learning classification techniques

Abstract

This paper proposes prediction of the bitcoin return direction with logistic, discriminant analysis and machine learning classification techniques. It extends the prediction of the bitcoin return direction using exogenous macroeconomic and financial variables which have been investigated as drivers of bitcoin return. We also use google trends as proxy for investors interest on bitcoin. We consider those variables as predictors for bitcoin return direction. We conduct an in-sample and out-of-sample empirical analysis and achieve a misclassification error around 4% for in-sample evaluation and around 41% in out-of-sample empirical analysis. Ensemble learning trees based outperforms the other methods in both in-sample and out-of-sample analyses.