Predicting bitcoin price movements using sentiment analysis: a machine learning approach

Abstract

Purpose

Cryptocurrencies such as Bitcoin (BTC) attracted a lot of attention in recent months due to their unprecedented price fluctuations. This paper aims to propose a new method for predicting the direction of BTC price using linear discriminant analysis (LDA) together with sentiment analysis.

Design/methodology/approach

Concretely, the authors train an LDA-based classifier that uses the current BTC price information and BTC news announcements headlines to forecast the next-day direction of BTC prices. The authors compare the results with a Support Vector Machine (SVM) model and random guess approach. The use of BTC price information and news announcements related to crypto enables us to value the importance of these different sources and types of information.

Findings

Relative to the LDA results, the SVM model was more accurate in predicting BTC next day’s price movement. All models yielded better forecasts of an increase in tomorrow’s BTC price compared to forecasting a decrease in the crypto price. The inclusion of news sentiment resulted in the highest forecast accuracy of 0.585 on the test data, which is superior to a random guess. The LDA (SVM) model with asset specific (news sentiment and asset specific) input features ranked first within their respective model classifiers, suggesting both BTC news sentiment and asset specific are prized factors in predicting tomorrow’s price direction.

Originality/value

To the best of the authors’ knowledge, this is the first study to analyze the potential effect of crypto-related sentiment and BTC specific news on BTC’s price using LDA and sentiment analysis.

Citation

Gurrib, I. and Kamalov, F. (2022), "Predicting bitcoin price movements using sentiment analysis: a machine learning approach", Studies in Economics and Finance, Vol. 39 No. 3, pp. 347-364. https://doi.org/10.1108/SEF-07-2021-0293