Causal-Structure-Based Cryptocurrency Price Direction Prediction Model

Abstract

In the highly volatile cryptocurrency market, trading decision support based on price prediction remains a challenging task. Although machine learning and deep learning techniques have been widely applied to cryptocurrency price prediction, many existing approaches rely on correlation-based black-box models, which limits interpretability and robustness. In this study, we employed a NOTEARS-Linear-based Prediction Model (NLBPM) that directly incorporated causal structures inferred through a causal discovery method as structural constraints within the prediction model. Unlike conventional approaches that focus primarily on minimizing prediction error, the NLBPM emphasized return maximization as its objective function, thereby prioritizing practical economic value. Using Bitcoin as a case study, we constructed a model to predict the direction of price movement four hours ahead and evaluated its performance using a rolling-window scheme with a one-month sliding window. Analysis of the inferred causal structures showed that the returns improved when trades were executed only during rolling-window trials in which specific directed edges to the target variable were detected. Based on this finding, we proposed a causal filter strategy that restricts trading to periods in which specific directed edges to the target variable are detected. In the data period analyzed in this study, the selected edge was the one from the opening price (Open) to the target variable. Backtesting experiments incorporating a transaction fee of 0.1% demonstrated that, while the benchmark LSTM model achieved a negative monthly average return of −3.20% and the NLBPM without filtering yielded −0.72%, the NLBPM with the Open filter attained a higher monthly average return of 10.35%. This study supports the usefulness of using inferred causal structure for cryptocurrency trading decision support.