Cryptocurrency price prediction and portfolio optimization based on LSTM and multi-task neural network

Abstract

The precise forecast of cryptocurrency prices is essential for portfolio investment because of their volatility and operability in virtual trading markets, which poses a huge trouble to investors' decision-making ability and investment planning. In this paper, we concentrated on the prediction of the recent trends of mainstream cryptocurrencies and selected them to optimize the portfolio to maximize profit and reduce risk. We used neural networks to solve this problem, which has three layers, including the LSTM layer, dropout layer, and dense layer. We focused on BCH, BTC, ETH, ETC, LTC, EOS, and XRP and collected their datasets for estimations. An LSTM model, a multi-task learning model, and a novel loss function, where the Negative Sharpe Ratio is provided, were implemented to predict the best portfolio (weights) for the cryptocurrencies mentioned above. The common evaluation indices, such as MSE, RMSE, MAE, and R-square ($ {R}^{2} $), can demonstrate the accuracy and reliability of the Neural Network models. Due to the significant price differences among currencies, the values of MSE, MSE, and MAE were large, making it difficult to evaluate their accuracy. Therefore, $ {R}^{2} $ was adopted. Finally, we simulated the portfolio investment and saw the revenue compared to the existing approaches. The new machine learning model abandoned the previous methods, which only predicted and analyzed a single cryptocurrency and ignored the correlations among them. Therefore, our innovation of this research was to use neural networks to consider investment plans combining multiple currencies while minimizing volatility and ensuring a large Sharpe Ratio, thereby obtaining the best portfolio investment of cryptocurrencies.