Forecasting Bitcoin volatility spikes from whale transactions and CryptoQuant data using Synthesizer Transformer models
This addresses risk management for cryptocurrency traders by improving volatility forecasting, though it appears incremental as it applies a modified transformer to existing data sources.
The paper tackled forecasting Bitcoin's extreme volatility spikes using CryptoQuant data and whale-alert tweets, proposing a Synthesizer Transformer model that outperforms state-of-the-art models and minimizes drawdown while maintaining steady profits in backtesting.
The cryptocurrency market is highly volatile compared to traditional financial markets. Hence, forecasting its volatility is crucial for risk management. In this paper, we investigate CryptoQuant data (e.g. on-chain analytics, exchange and miner data) and whale-alert tweets, and explore their relationship to Bitcoin's next-day volatility, with a focus on extreme volatility spikes. We propose a deep learning Synthesizer Transformer model for forecasting volatility. Our results show that the model outperforms existing state-of-the-art models when forecasting extreme volatility spikes for Bitcoin using CryptoQuant data as well as whale-alert tweets. We analysed our model with the Captum XAI library to investigate which features are most important. We also backtested our prediction results with different baseline trading strategies and the results show that we are able to minimize drawdown while keeping steady profits. Our findings underscore that the proposed method is a useful tool for forecasting extreme volatility movements in the Bitcoin market.