Title: Causal Feature Engineering of Price Directions of Cryptocurrencies using Dynamic Bayesian Networks

Abstract: Cryptocurrencies have gained popularity across various sectors, especially in finance and investment. The popularity is partly due to their unique specifications originating from blockchain-related characteristics such as privacy, decentralisation, and untraceability. Despite their growing popularity, cryptocurrencies remain a high-risk investment due to their price volatility and uncertainty. The inherent volatility in cryptocurrency prices, coupled with internal cryptocurrency-related factors and external influential global economic factors makes predicting their prices and price movement directions challenging. Nevertheless, the knowledge obtained from predicting the direction of cryptocurrency prices can provide valuable guidance for investors in making informed investment decisions. To address this issue, this paper proposes a dynamic Bayesian network (DBN) approach, which can model complex systems in multivariate settings, to predict the price movement direction of five popular altcoins (cryptocurrencies other than Bitcoin) in the next trading day. The efficacy of the proposed model in predicting cryptocurrency price directions is evaluated from two perspectives. Firstly, our proposed approach is compared to two baseline models, namely an auto-regressive integrated moving average and support vector regression. Secondly, from a feature engineering point of view, the impact of twenty-three different features, grouped into four categories, on the DBN's prediction performance is investigated. The experimental results demonstrate that the DBN significantly outperforms the baseline models. In addition, among the groups of features, technical indicators are found to be the most effective predictors of cryptocurrency price directions.