Forecasting Cryptocurrency Markets: Predictive Modelling Using Statistical and Machine Learning Approaches

Abstract

The rapidly evolving landscape of cryptocurrency markets presents unique challenges and opportunities. The significant daily variations in cryptocurrency exchange rates lead to substantial risks associated with investments in crypto assets. This study aims to forecast the prices of cryptocurrencies using advanced machine learning models. Among seven models that were tested for their prediction and validation efficiency, Neutral Networks performed the best with minimum error. Thus, Long Short-Term Memory (LSTM) neural networks were used for predicting future trends. LSTM model is well-suited for analyzing complex dependencies in financial data. Starting with historical data collection, data preprocessing, feature engineering, normalization and integrative binning, a comprehensive Exploratory Data Analysis (EDA) was conducted on 50 cryptocurrencies. Top performers were identified based on criteria such as trading volume, market capitalization, and price trends. The LSTM model was implemented using Python to predict 90-day price movements data to check intricate patterns and relationships. Model performance was validated by performance metrics such as MAE and RMSE. The findings align with the Adaptive Market Hypothesis (AMH) which suggests that cryptocurrency markets exhibit dynamic efficiency influenced by evolving market conditions and investor behavior. The study shows the potential of machine learning models in financial economics and their role in enhancing risk management strategies and investment decision-making processes.