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    Bayesian Regression and Bitcoin: Devevrat Shah and Kang Zhang

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    abaskm
    This document discusses using Bayesian regression and a latent source model (BR-LSM) to predict Bitcoin prices. It first provides background on Bitcoin and describes the price and order book data collected. It then outlines a trading strategy that makes buy/sell decisions based on predicted 10-second price changes. Testing on historical data from May-June 2014 yielded an 89% return. The document introduces BR-LSM for predicting prices by modeling price variations as combinations of representative patterns/segments. It shows how BR-LSM can be used to predict near-term price changes based on current and historical data.

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    © All Rights Reserved
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    Bayesian Regression and Bitcoin: Devevrat Shah and Kang Zhang

    Uploaded by

    abaskm
    76 views15 pages
    This document discusses using Bayesian regression and a latent source model (BR-LSM) to predict Bitcoin prices. It first provides background on Bitcoin and describes the price and order book data collected. It then outlines a trading strategy that makes buy/sell decisions based on predicted 10-second price changes. Testing on historical data from May-June 2014 yielded an 89% return. The document introduces BR-LSM for predicting prices by modeling price variations as combinations of representative patterns/segments. It shows how BR-LSM can be used to predict near-term price changes based on current and historical data.

    Original Description:

    Devavrat Shah Bayesian Regression and Bitcoin

    Original Title

    MIT Presentation

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    This document discusses using Bayesian regression and a latent source model (BR-LSM) to predict Bitcoin prices. It first provides background on Bitcoin and describes the price and order book data collected. It then outlines a trading strategy that makes buy/sell decisions based on predicted 10-second price changes. Testing on historical data from May-June 2014 yielded an 89% return. The document introduces BR-LSM for predicting prices by modeling price variations as combinations of representative patterns/segments. It shows how BR-LSM can be used to predict near-term price changes based on current and historical data.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    76 views15 pages

    Bayesian Regression and Bitcoin: Devevrat Shah and Kang Zhang

    Uploaded by

    abaskm
    This document discusses using Bayesian regression and a latent source model (BR-LSM) to predict Bitcoin prices. It first provides background on Bitcoin and describes the price and order book data collected. It then outlines a trading strategy that makes buy/sell decisions based on predicted 10-second price changes. Testing on historical data from May-June 2014 yielded an 89% return. The document introduces BR-LSM for predicting prices by modeling price variations as combinations of representative patterns/segments. It shows how BR-LSM can be used to predict near-term price changes based on current and historical data.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 15

    Bayesian regression and

    Bitcoin
    Devevrat Shah and Kang
    Zhang

    P2P cryptographic, virtual currency


    Created in 2009 by Satoshi Nakamoto (alias)
    Unregulated
    Can be purchased at handful of exchanges e.g
    Okcoin.com
    Mined by solving/computing cryptographic
    puzzles (2.5 bitcoin/min)
    Market cap US $4B
    Daily transaction volume US $10M - $50M

    Is Bitcoin price predictable?


    Can it result into profitable strategy?

    Data
    February 2014 till July 2014
    Price of Bitcoin
    Order book at the exchange
    60 best prices and associated and associated
    for ask
    60 best prices and associated and associated
    for bid

    Over 200M raw data points


    Converted into evenly spaced (10 sec)
    time-series

    Trading strategy
    Minimal position
    -1, 0 or +1 Bitcoin

    At each chosen* time instance


    Predict average price change p over next 10s
    If p > threshold and current position is 0
    Buy 1 Bitcoin

    If p < threshold and current position is 0


    Sell 1 Bitcoin

    Else do nothing

    * Selection of time instances are done by looking for


    inflection points in price

    Performance: May 6-June


    24, 2014

    Profit of 3362 yuan over 50 days


    Average investment of 3781 yuan

    89% return

    Performance: May 6-June


    24, 2014
    How consistent is the strategy?
    Sharpe ratio is 4.10 over N = 2872
    trades
    profit riskfree
    Recall
    profit
    ave

    Sharpe ratio =

    std

    Where

    profit ave

    1 N
    = profit i
    N i=1

    1
    riskfree = startprice endprice
    N
    N

    profit

    2
    std

    1
    = ( profiti profitave )
    N i=1

    Regression
    x R y R,
    Given observation
    Training labeled data
    { x1, y1},L ,{ x n , y n }
    Approach from non-parametric statistics
    d

    y = f (x) +

    Example
    f (x) = x T *
    Noise
    standard Gaussian
    n
    2
    Estimate
    T
    LS argmin ( y i x i )
    R
    Predict
    i=1
    T
    x LS
    y=

    Bayesian Regression
    x Rd y R ,
    Given observation
    Training labeled data
    { x1, y1},L ,{ x n , y n }
    Bayesian Inference

    PXY

    ComputeP(y | x)
    n
    Use data as proxy
    P(y | x) 1(y i = y, x i = x)
    i=1
    Predicty=
    E p [Y | x ]

    Bayesian Regression [cf. Bishop and Tipping 2003]

    Bayesian Regression and Latent


    Source
    Model
    d
    x R y R ,
    Given observation
    Training labeled data
    { x1, y1},L ,{ x n , y n }
    PXY
    Latent Source Model

    K sources x1,L , x K R d
    with probabilities
    {1,K , K }

    Distribution over

    ,K}
    {1,K

    K distributions
    P1,L ,PK
    Choose
    T

    over
    {1,K ,K } P(T = k) = k

    Generate
    X = sT +
    standard Gaussian
    Y ~ PT

    Draw

    each
    R over
    noise
    where

    is

    Latent Source Model by [Chen, Nikolov, Shah 13] [Bresler, Chen,

    Predicting Price

    Segments of Price Variation

    Bayesian Regression and Latent


    Source Model
    y R
    x R
    Given observation
    , predict
    Training labeled data
    { x1, y1},L ,{ x n , y n }
    d

    Bayesian regression for latent source model


    n

    Gaussian
    (BR-LSM)
    ? 1
    2 ?
    x x i 2 ?Noise
    y i exp ?
    ? 4
    ?

    i=1
    E emp [y | x] = n
    y
    ? 1
    2 ?
    x x i 2 ?
    exp ?
    ? 4
    ?
    i=1

    X(x)y
    y=

    Predicting Price: BR-LSM


    Data = Model

    Current
    Price

    Historical
    Data

    future
    prediction

    Predicting Price: BR-LSM

    Current
    Price

    future
    prediction

    Predicting Price using BR-LSM


    Predicting price change
    p
    Create price time-series segments from Feb-late March 2014
    price data.
    Three different lengths 30 mins, 60 mins, 120 mins
    Select representative
    segments for each of these lengths
    S1, S2, S3
    Denote
    Si
    i {1,2,3}
    pi
    Using BR-LSM over
    predict
    for

    (v bid v ask )
    r=
    book data

    From order

    compute
    (v bid + v ask )

    Predict
    3

    w j p j + w 4 r
    p = w 0 +
    j =1

    weights are fitted using data in late March-early May


    2014

    Representative Patterns

    Triangle

    cf[Caginalp and Laurent 88, Lo and MacKinlay 98 and 99]

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