Accurate Bitcoin Price Forecasting with Python – Blockchain Applications of Data Science Part 2

Accurate Bitcoin Price Forecasting with Python – Blockchain Applications of Data Science Part 2

Recap

We discussed earlier in Part 1 of Blockchain Applications of Data Science on this blog how the world could be made to become much more profitable for not just a select set of the super-rich but also to the common man, to anyone who participates in creating a digitally trackable product. We discussed how large scale adoption of cryptocurrencies and blockchain technology worldwide could herald a change in the economic demography of the world that could last for generations to come. In this article, we discuss how AI and data science can be used to tackle one of the most pressing questions of the blockchain revolution – how to model the future price of the Bitcoin cryptocurrency for trading for massive profit.

A Detour

But first, we take a short detour to explore another aspect of cryptocurrency that is not commonly talked about. Looking at the state of the world right now, it should be discussed more and I feel compelled to share this information with you before we skip to the juicy part about cryptocurrency price forecasting.

The Environmental Impact of Cryptocurrency Mining

Now, two fundamental assumptions. I assume you’ve read Part 1, which contained a link to a visual guide of how cryptocurrencies work. In case you missed the latter, here’s a link for you to check again.

The following articles speak about the impact of cryptocurrency mining on the environment. Read at least one partially at the very least so that you will understand as we progress with this article:

https://www.theguardian.com/technology/2018/jan/17/bitcoin-electricity-usage-huge-climate-cryptocurrency

So cryptocurrency mining involves a huge wastage of computational resources, energy, and enough electrical power to run an entire country. This is mainly due to the model of the Proof-of-Work PoW mining system used by Bitcoin. For more, see the following article..

https://www.investopedia.com/tech/whats-environmental-impact-cryptocurrency/

In PoW mining, miners compete against each other in a desperate race to see who can find the solution to a mathematical hashing problem the quickest. And in every race, only one miner is rewarded with the Bitcoin value.

image result for Ethereum goes Green
Ethereum goes Green! (From Pixabay)

 

In a significant step forward, Vitalin Buterik’s Ethereum cryptocurrency has shifted to Proof-of-Stake based (PoS) mining system. This makes the mining process significantly less energy intensive than PoW. Some claim the energy savings may be 99.9% more efficient than PoW. Whatever the statistics may be, a PoS based mining process is a big step forward and may completely change the way the environmentalists feel about cryptocurrencies.

So by shifting to PoS mining we can save a huge amount of energy. That is a caveat you need to remember and be aware about because Bitcoin uses PoW mining only. It would be a dream come true for an environmentalist if Bitcoin could shift to PoS mining. Let’s hope and pray that it happens.

Now back to our main topic.

Use AI and Data Science to Predict Future Prices of Cryptocurrency – Including the Burst of the Bitcoin Bubble

What is a blockchain? A distributed database that is decentralized and has no central point of control. As on Feb 2018, the Bitcoin blockchain on a full node was 160-odd GB in size. Now in April 2019, it is 210 GB in size. So this is the question I am going to pose to you. Would it be possible to use the data in the blockchain distributed database to identify patterns and statistical invariances to invest minimally with maximum possible profit? Can we forecast and build models to predict the prices of cryptocurrency in the future using AI and data science? The answer is a definite yes.

Practical Considerations

You may wonder if applying data science techniques and statistical analysis can actually produce information that can help in forecasting the future price of bitcoin. I came across a remarkable kernel on www.Kaggle.com (a website for data scientists to practice problems and compete with each other in competitions) by a user with the handle wayward artisan and the profile name Tania J. I thought it was worth sharing since this is a statistical analysis of the rise and the fall of the bitcoin bubble vividly illustrating how statistical methods helped this user to forecast the future price of bitcoin. The entire kernel is very large and interesting, please do visit it at the link given below. Just the start and the middle section of the kernel is given here because of space considerations and intellectual property considerations as well.

image result for home for data science @ kaggle
Your home for data science.

A Kaggle Kernel That Modelled the Bitcoin Bubble Burst Within Reasonable Error Limits

This following kernel uses cryptocurrency financial data scraped from www.coinmarketcap.com. It is a sobering example of how AI predictions actually predicted the collapse of the bitcoin bubble, prompting as many sellers to sell as they did. Coming across this kernel is one of the main motivations to write this article. I have omitted a lot of details, especially building the model and analyzing its accuracy. I just wanted to show that it was possible.

For more details, visit the kernel on Kaggle at the link:
https://www.kaggle.com/taniaj/cryptocurrency-price-forecasting (Please visit this page, all aspiring data scientists. And pay attention to every concept discussed and used. Use Google and Wikipedia and you will learn a lot.)

A subset of the code is given below (the first section):

<subsequent code not shown for brevity>

The dataset is available at the following link as a csv file in Microsoft Excel:

 

We focus on one of the middle sections with the first ARIMA model with SARIMAX (do look up Wikipedia and Google Search to learn about ARIMA and SARIMAX) which does the actual prediction at the time that the bitcoin bubble burst (only a subset of the code is shown). Visit the Kaggle kernel page on the link below this extract to get the entire code:

<data analysis and model analysis code section not shown here for brevity>

<more code, not shown>

From
Kaggle Code

This code and the code earlier in the kernel (not shown for the sake of brevity) that built the model for accuracy gave the following predictions as output:

Bitcoin price forecasting at the time of the burst of the Bitcoin bubble

What do we learn? Surprisingly, the model captures the Bitcoin bubble burst with a remarkably accurate prediction (error levels ~ 10%)!

Conclusion

So, does AI and data science have anything to do with blockchain technology and cryptocurrency? The answer is a resounding, yes. Expect data science, statistical analysis, neural networks, and probability model distributions to play a heavy part when you want to forecast cryptocurrency prices.

For all the data science students out there, I am going to include one more screen from the same kernel on Kaggle (link):

The reason I want to show you this screen is that the terms and statistical lingo like kurtosis and heteroskedasticity are statistics concepts that you need to master in order to conduct forecasts like this, the main reason being to analyze the accuracy of the model you have constructed. The output window is given below:

So yes, blockchain technology and cryptocurrencies have a lot of overlap with applications. But also remember, data science can be applied to any field where finance is a factor.

For more on blockchain and data science, see:

A Beginner’s Guide to Big Data and Blockchain

Enjoy data science!

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A Personal Digital Assets Manager – Blockchain Applications of Data Science Part 1

A Personal Digital Assets Manager – Blockchain Applications of Data Science Part 1

The Potential of Blockchain Technology

 

Unless you’ve been living with your head under a rock for the last 4 years, you will definitely have heard of Bitcoin. You would also have heard about the technology behind Bitcoin, Blockchain. Now cryptocurrencies are banned in most cases in India and China, but the Americas and Europe still use cryptocurrencies extensively. And in my opinion, Asia stands to lose a lot if blockchain is not adopted extensively everywhere. Because make no mistake about it – blockchain technology will change the world as we know it. Forever.

Blockchain is the technology powering Bitcoin and other cryptocurrencies. To explain what blockchain is and what bitcoin is you can go through anyone of the articles below. Don’t worry these articles are carefully selected to be as interesting and fun to read as possible. (This also gives me space to add my own original ideas instead of copying or rewording existing articles – and I have plenty (of ideas)!

References to Understand Blockchain

For technical readers:

Wiki-Blockchain

For non-technical readers:

Whats blockchain in plain English- Quora

For the researchers:

NCBI-Article

For those of you with no time and who like visual explanations:

Graphics Reuters- Visual Explanations

In fact, that last link is so amazingly simple visual and clear that I recommend everyone read it. Just so that we’re on the same page.

Exciting Applications

Image result for bitcoin
From Pixabay

 

Cut to the chase. A little confession here. I was asked to do this article nearly 16 days ago. Now I have some experience with blockchain before since having gone through it extensively as a research topic for my own blog. Then a remarkable idea hit me. An idea for a startup that could (in theory) become a multi-billion dollar enterprise. I spent a few days refining it, even going so far as to see if I could start this company with this area myself, until reality set in – I lacked the experience and the business skills.

No sooner had this realization struck me and the excitement cooled a little, another idea to improve blockchain struck me, and I promise to sketch out that idea as well. I am doing this for two reasons:

  • I am staunch support of the FOSS (free open source software movement and would like to be credited with the idea, and I am starting a free to use, open source project on GitHub – working on it, currently moving towards an alpha release as of now.  
  • I believe in the power of technology to remove economic inequality. Now you may say that technology has evolved to the point that 4-5 monolithic companies dominate the entire world. But I believe that technology when used ethically has the potential to create more opportunities than it removes.
  • Blockchain has two major problems – energy consumption and resource consumption. But there are techniques that can alleviate both of these problems. We’ll deal with that as well in Part 2.
  • Finally, the vaunted hype about security for blockchain and cryptocurrencies is ridiculous when you think about it. For the sake of brevity, I will address the main security issues with blockchain in a separate article on Medium – (not here, since it has no relation to data science).

Application – A Personal Blockchain For Every Person On The Planet

In points (I assume you’ve gone through the graphical explanation of blockchain at least – if not you can review it here):

  • The trouble with end products of all types that are produced today is that there are so many intermediaries between the producer and the consumer that the producers receives a pittance compared to the end final price. It would be nice if we could track a product everywhere that it is used.
  • This is also applicable for books, music, articles, poems, pictures, any digital content of any sort. Currently Amazon and YouTube monopolize content distribution, the latter with a complete disregard for copyright and media ownership and payment. Suppose we had a tracking system that viewed every view of a video, and rewarded the original producer for it?
  • To emphasize the previous point, let us consider the case of Lindsey Stirling. Lindsey Stirling is a famous contemporary violinist who dances while playing. Her 118 video uploads have earned her 2,575,305,706 views, 2.5 billion approx, and her earnings from YouTube ads last month was 100K a month. Her net worth as on 10th April 2019 is 12 million USD (12,000,000).
  • But suppose Lindsey Stirling distributed her videos at a price of 1 USD every view. Her net worth would be 2.6 billion USD at the very least! She would be a multi-billionaire had this platform existed. It doesn’t – yet. And because it doesn’t exist she is 2.49 billion USD poorer!

Now everyone who knows blockchain technology will now realize this idea, the concept, and how blockchain can be used to overcome this problem – and its power. Disruptive power!

The Solution

The blockchain is a service that immutably assigns ownership.

The blockchain is also a database that stores every single transaction on a particular digitisable entity.

Finally, the Ethereum smart contract technology means that we can assign payments to go to every person on his own personal blockchain of all his digitisable goods.

This means we can build a world where producer pays a user-defined amount to every entity which created a particular digitisable product.

On this platform or website or marketplace, producers can adjust their prices and their payments and consumers can buy directly from them.

Everything can be tracked on the blockchain. Your own database of your own transactions can be used with smart contracts to pay the maximum possible fee to the most deserving person in the supply chain – fixed by each producer.

Hugely, Massively Disruptive

If you are interested or want to know more, you can leave a comment below with your email address. If you want to be a part of this new revolution and the new decentralised world – with all services provided free – please provide a comment below asking for my email ID with a statement of what and how you want to contribute to this endeavor. I promise to reply to every sincere query.

This is a fledgling project and a lot of work remains to be done. I will be writing articles and creating a team to work on this idea. Those of you who are interested please mail me at thomascherickal@gmail.com.

This will be an open source project and all services have to be offered free of cost. How do you go about making a profit from this? You don’t! The only way this can be fair to all players in countries like India is if it is specially designed to be applicable to anyone.

So this article gave a small glimpse into a world without intermediaries, corporations, money-making middlemen, and running purely on smart contracts. This is applicable to AI and data science since this technology will not reach anywhere significant without extensive use of AI and data science.

The more data that is available, the more analysis can be performed on it. And unless we have analysts who are running monitoring fraud detection systems fulltime on such a system, we might as well never build it – because blockchain data integrity cannot be hacked, but cryptocurrencies are hackable and have been hacked extensively since the beginning of Bitcoin.

For Part 2 of this series on Blockchain Applications of Data Science, you can go to the link below:

https://dimensionless.in/how-a-kaggle-jupyter-notebook-with-a-python-kernel-correctly-predicted-the-burst-of-the-bitcoin-bubble-with-reasonable-accuracy

For more on AI and Blockchain, I suggest that you refer to the article below:

A Beginner’s Guide to Big Data and Blockchain

and you can go to the link below to access our course on Python and R.

Data Science using R & Python

As always, enjoy artificial intelligence! You are privileged to be at the forefront of humanity’s push into the new uncharted future. All the best!