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Determinants of the price of bitcoin: An analysis with machine learning and interpretability techniques

In: Granular data: new horizons and challenges

Author

Listed:
  • José Manuel Carbó Martinez
  • Sergio Gorjón Rivas

Abstract

In this paper we investigate the variables that influence the trading price of bitcoin. Utilizing a Long Short-Term Memory (LSTM) neural network, a flexible machine learning model, we determine bitcoin's price based on various economic, technological, and investor attention factors. The LSTM model replicates bitcoin price behavior reasonably well across different time periods. We then employ the SHAP interpretability approach to identify the most important features affecting the LSTM's outcome. We conclude that, over time, technological variables decrease in importance, while those related to investor attention gain prominence. Moreover, beyond the shifting influence of variables, new explanatory factors seem to appear over time that, at least for the most part, remain initially unknown. Improving the understanding of the factors that influence price formation, as well as its possible (in)stability over time, could help anticipate real risks to the system and, support the design of a regulatory framework that helps contain them.
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Suggested Citation

  • José Manuel Carbó Martinez & Sergio Gorjón Rivas, 2024. "Determinants of the price of bitcoin: An analysis with machine learning and interpretability techniques," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Granular data: new horizons and challenges, volume 61, Bank for International Settlements.
    • Handle: RePEc:bis:bisifc:61-08
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    JEL classification:

    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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