Exogenous factors that influence returns of Bitcoin and Ether

Abstract

Purpose of the paper - to determine if essential global economic factors are influencing returns of Bitcoin and/or Ether and if these cryptocurrencies react to forementioned economic factors as a phenomenon of one financial entity. In this paper we apply SARMAX family models to forecast the daily returns of the two main cryptocurrencies with the highest capitalization - Bitcoin and Ether the circulating cryptocurrency in the ethereum blockchain network. We analysed 10 essential global economic factors (Crude oil, Gold, EUR/USD, 10-yr bond, Vix, CMC Crypto 200, FTSE 100, Nikkei 225, DAX 30, S&P 500) to determine which of them have the highest weight for the prediction of the returns of the Bitcoin and Ether as a supplement to their autoregressive nature and determined 5 most important exogenous factors to predict the returns of the analysed cryptocurrencies. We used machine learning algorithms to set the weights of the SARMAX models dependent variables as well as the form of the model itself.