N2 - In the aftermath of the global financial crisis and on-going COVID, investors face challenges in understanding price dynamics across assets.
In this paper, we explore the applicability of a large scale comparison of machine learning algorithms MLA to predict mid-price movement for bitcoin futures prices. We use high-frequency intra-day data to evaluate the relative forecasting performances across various time-frequencies, ranging between 5-minutes and minutes. The empirical analysis is based on six different specifications of MLA methods during periods of pandemic.
Price discovery in bitcoin futures
The empirical results show that MLA outperforms the random walk and ARIMA forecasts in Bitcoin futures markets, which may have important implications in the decision-making process of predictability. AB - In the aftermath of the global financial crisis and on-going COVID, investors face challenges in understanding price dynamics across assets.
The mechanism they describe hinges on the same driving force of optimistic and pessimistic traders. Why, then, did the price of bitcoin fall somewhat gradually rather than collapse overnight? The answer to this is difficult. It could be that pessimistic investors lack the attention, willingness, or ability to enter the market on the first day or week of trading. Consistent with this assertion, the total volume of transactions in the CME futures market started very low, with an average trading volume of contracts promising to deliver approximately 12, bitcoins during the first week of trading, relative to the estimated spot market turnover of , bitcoins.
So where is the price of bitcoin going?
- Evidence from the Introduction of Bitcoin Futures Contracts.
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This is a very difficult question, and we do not pretend to be able to forecast bitcoin prices, nor will we offer any guesses. Instead, we outline a few factors that may affect the fundamental price of bitcoin, which is where we would expect the price to go in the long run, once speculative demand by optimists and pessimists balances out.
The supply of bitcoins is determined by the volume of bitcoin currently in circulation and the additional volume to be mined. The decision to mine a bitcoin depends on the cost and benefit from mining.
Blockchain Bites: Crypto in the Red, BlackRock Green Lights Bitcoin Futures - CoinDesk
More generally, however, the mining cost of bitcoin should not affect its value any more than the cost of printing regular currency affects its value—basically not at all. We know that bitcoin is used as a means of exchange in a number of markets. The amount of bitcoins needed for these markets to function constitutes transactional demand. The supply growth of bitcoin is becoming more limited as the mining price increases.
If transactional demand grows faster than supply, we would expect the price to grow. Transactional demand in turn depends on a number of factors. One is the availability of substitutes. If a different cryptocurrency becomes more widely used as a means of exchange in the markets currently dominated by bitcoin, demand for bitcoin may drop precipitously because these tend to be winner-takes-all markets. Second, if traditional financial institutions become more willing to accept bitcoin as collateral, a means of payment, or a direct investment, demand may increase substantially.
Growing Interest
Finally, official recognition and regulatory acceptance of bitcoin as a means of payments would increase its circulation, while regulatory constraints or introduction of transaction fees may reduce it. We suggest that the rapid rise of the price of bitcoin and its decline following issuance of futures on the CME is consistent with pricing dynamics suggested elsewhere in financial theory and with previously observed trading behavior. Namely, optimists bid up the price before financial instruments are available to short the market Fostel and Geanakoplos Once derivatives markets become sufficiently deep, short-selling pressure from pessimists leads to a sharp decline in value.
While we understand some of the factors that play a role in determining the long-run price of bitcoin, our understanding of the transactional benefits of bitcoin is too imprecise to quantify this long-run price. But as speculative dynamics disappear from the bitcoin market, the transactional benefits are likely to be the factor that will drive valuation. Galina B. Arvind Krishnamurthy is John S. Berentsen, Aleksander, and Fabian Schar. Louis Review 1 , pp. Chiu, Jonathan, and Thorsten Koeppl. Fostel, Ana, and John Geanakoplos.
Hayes, Adam. Nakamoto, Satoshi. David Lee Kuo Chuen.
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