Chapter – 1

Introduction
Building algorithms and models to predict prices and future events has been given a
significant amount of attention in the past decade. With user data being collected through
various forms of paths, there has never been an abundance in raw data like there is now. Any
model capable of predicting a future event whether it be to find out what the next big trend is
or to predict the next behavior of a customer, most predictive models possess great potential
to change opportunity into revenue. The price prediction category is no different. For years
analysts and researches have been studying and trying to improve algorithms to help predict
future prices. Unfortunately, the protections cannot be based purely on just previous prices,
though it should still considered to have the most contribution to the model, other things such
as economic growth, social and popularity of the commodity also play a significant role price
predictions.

1.1 Objectives
The objective of this project is to predict the bitcoin prices based on the data and providing
information to user that in which direction price will move.

1.2 Problem Specification

For years analysts and researches have been studying and trying to improve algorithms to
help predict future prices. Unfortunately, the predictions cannot be based purely on just
previous prices, though it should still considered to have the most contribution to the model,
other things such as economic growth, social and popularity of the commodity also play a
significant role price predictions.
A methodology was developed for predicting Bitcoin price by predicted trading volume
using Google Trends views. However, one limitation of such studies is the often small sample
size, and propensity for misinformation to spread through various (social) media channels
such as Twitter or on message boards such as Reddit, which artificially inflate/deflate prices
[5]. In the Bitcoin exchanges liquidity is considerably limited. As a result, the market suffers
from a greater risk of manipulation. For this reason, sentiment from social media is not
considered further.
  Predictions based solely on previous data results in low accuracy.
 Sentiment analysis is not considered to be a factor because social media suffer from
greater risk of manipulation

1.3 Methodologies
Support vector machine algorithms have been successfully used in the past as we studies in
research works done in . In particular, support vector machines (SVM) are suggested to work
well with small or noisy data and this have been used widely in the asset returns prediction
problems. SVM classification has the advantage of yielding global optimal values. In this
project, a predictive model is analyzed based on the input and the accuracy of the result. The
model was built using the SVM.

Having the data is critical to build and machine learning model and the quality of data is also
important. In such a scenario, there is need to be an algorithm and procedure to check
whether the given data is valid. In the project, an anomaly detection model was implemented
by using unsupervised learning. K-means clustering was used to group the data into m-data
points as there are no labels for the data. Once the group is ready the data was fed into a
unsupervised support vector machine to recognize the anomalies in the given sequence of m-
data points.

The neural networks built on in this project were completed using the Keras libraries. Keras
offers neural network API which can run on Tensorflow or Theano. Keras was selected for its
user-friendly API’s and its ability to support multiple CPU’s as well as GPU’s. Keras
facilitates seamless prototyping. Like all python libraries Keras also takes advantages of the
modularity concept providing users with independent configurable modules. These modules
are also customizable allowing the developers to create new and more effective model to suit
their requirements. Since all the code is purely written in python, python developers do not
find it hard to debug or run complex modified code.

1.4 Contributions
This project differs from the already done studies in that it is among the first to examine the
predictability of bitcoin value using a predictive model using deep learning methodology.
1.5 Organization Of The Project
The rest of the project is organized as follows.
Chapter 2 discusses the related work done in the area of bitcoin price prediction. This section
greatly helped us to work on our project giving precise areas for improvement.
Chapter 3 gives the software requirements, hardware requirements, functional and non
functional requirements of the proposed project work .
Chapter 4 discusses the project design with System Architecture, DFD, UML Diagram and
ER Diagrams.
Chapter 5 give overall implementation details of our project.
Chapter 6 provides the testing part, test cases and results
The last chapter gives conclusion and future prospects.
 Chapter – 2
Literature Survey

In [1] the authors Pagnotta, E. and A. Buraschi address the valuation of bitcoins and other
blockchain tokens in a new type of production economy: a decentralized financial network
(DN). An identifying property of these assets is that contributors to the DN trust (miners)
receive units of the same asset used by consumers of DN services. Therefore, the overall
production (hashrate) and the bitcoin price are jointly determined. Pagnotta, E. and A.
Buraschi characterize the demand for bitcoins and the supply of hashrate and show that the
equilibrium price is obtained by solving a fixed-point problem and study its determinants.
Price-hashrate “spirals” amplify demand and supply shocks.

Unlike traditional payment systems, has no owner and is governed by a computer protocol.
This project models Bitcoin as a platform that intermediates between users and computer
servers (“miners”) which operate the Bitcoin payment system (BPS) and studies the novel
market design of this owner-less platform. In [2] Gur Huberman find that the BPS can
eliminate inefficiencies due to market power but incurs other costs. Having fixed transaction
processing capacity, the BPS experiences service delays which motivate users to pay for
service priority. Free entry implies that miners cannot profitably affect the level of fees paid
by users. The project derives closed form formulas of the fees and waiting times and studies
their properties; compares pricing under the BPS to that under a traditional payment system
operated by a profit maximizing firm; and suggests protocol design modification to enhance
the platform’s efficiency. The appendix describes and explains the main attributes of Bitcoin
and the underlying blockchain technology.
Owned by nobody and controlled by an almost immutable protocol the Bitcoin payment
system is a platform with two main constituencies: users and profit seeking miners who
maintain the system's infrastructure. The project seeks to understand the economics of the
system: How does the system raise revenue to pay for its infrastructure? How are usage fees
determined? How much infrastructure is deployed? What are the implications of changing
parameters in the protocol? A simplified economic model that captures the system's
properties answers these questions. Transaction fees and infrastructure level are determined
in an equilibrium of a congestion queueing game derived from the system's limited
throughput. The system eliminates dead-weight loss from monopoly but introduces other
inefficiencies and requires congestion to raise revenue and fund infrastructure. Huberman , G.
, J.D.Leshno explore the future potential of such systems and provide design suggestions[3].

The proposed tests in [4], the technical trading rule of moving average (MA) in a long-only
portfolio using exchange traded funds (ETFs). Huang, J.-Z. and Z.J. Huang also propose a
quasi-intraday version of the MA strategy (QUIMA) that allows investors to trade
immediately upon observing MA crossover signals. We find that 1) this QUIMA strategy
outperforms the traditional version of the MA strategy that only trades at the close of a
trading day, when the long-term MA lag length is not too long, 2) the documented
profitability of MA strategy on indices is greatly reduced on ETFs, mainly due to more
frequent and larger opening gaps on ETF prices than those on indices, and 3) relative to the
buy-and-hold strategy, MA strategies have lower return, but better risk-adjusted performance
measures such as the CAPM alpha. In addition, Huang, J.-Z. and Z.J. Huang find that among
various long-term MA lengths, the 10-day MA turns out to be overly exploited by investors
as its performance is significantly lower than those of surrounding MA lengths. Overall, our
findings indicate that profitability of the MA trading rule reduces on tradable ETFs than on
non-tradable indices.
The authors in [5] developed a model of user adoption and use of virtual currency (such as
Bitcoin) and focusing on the dynamics of adoption in the presence of frictions arising from
exchange rate uncertainty. The theoretical model can be used to analyze how market
fundamentals determine the exchange rate of fiat currency to Bitcoin. Empirical evidence
from Bitcoin prices and utilization provides mixed evidence about the ability of the model to
explain prices. Further analysis of the history of all individual transactions on Bitcoin’s
public ledger establishes patterns of adoption and utilization across user types, transaction
type, and geography. We show that as of mid-2015, active usage was not growing quickly,
and that investors and infrequent users held the majority of Bitcoins. We document the extent
to which the attributes of the anonymous users of Bitcoin can be inferred through their
behavior, and found that users who engage in illegal activity are more likely to try to protect
their financial privacy.