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Mathematicians Forecast Future Values of Digital Money

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With Facebook’s Libra expected to launch in 2020 and investment in digital currencies increasing, a team of faculty and student researchers in the Department of Mathematics analyzed and predicted future values of three cryptocurrencies.

The researchers interpreted the future values of the closing prices for Bitcoin, Litecoin and Ethereum to help better assess how and when investing and trading could maximize returns. For their study, the mathematicians analyzed how prices changed from January 2014 to June 2019 for each of these cryptocurrencies. 

By using a specific mathematical model, they analyzed the short-term volatility of each currency and forecasted future closing prices. 

“The focus of this work is to construct a mathematical model that provides insight into the risk associated with buying cryptocurrencies,” said Anael Verdugo, associate professor of mathematics.

Cryptocurrency — a type of digital money that uses encryption technology — faced its first successful run in 2009 with Bitcoin. Since, other digital currencies such as Litecoin and Ethereum have followed.

The researchers conducted an analysis of current data for the three cryptocurrencies, constructed various mathematical models and compared theoretical results with cryptocurrency and stock market data, Verdugo explained. Various mathematical tools and concepts were used in this work, some of which included mathematical modeling, statistical analysis and computer programming. 

Undergraduate Zaib Quraishi added that to figure out when to accurately predict the best time to invest, while minimizing the risk, she and fellow student researchers learned to use programming languages, including Python and R. 

“We developed skills on how to study data and gained a stronger understanding of how our analyses and results can be applied to the real world,” said Quraishi, an applied mathematics major whose work focused on the volatility of cryptocurrencies.

Line graph showing Bitcoin forecast

The mathematics research team created this graphic, which shows the values of Bitcoin from January 2016 to June 2019 along with short-term predictions for future values. The current value of Bitcoin — $7,177 on Dec. 11, 2019 — falls within the forecasted range.

One of the main results of their study was confirmation that cryptocurrencies have a higher risk, or volatility, associated with price fluctuations in the crypto-market as compared to other more traditional markets, Verdugo said. 

Verdugo relayed that an exact “volatility index” has not been well defined or generally accepted for cryptocurrencies, which is an important reason why the public is concerned about its potential as an alternative currency. 

“It’s well known that sometimes the market value of cryptocurrencies explodes, then plunges deep and then somehow recovers slowly overtime,” said Verdugo, who plans to publish their findings in a peer-reviewed journal. “Understanding and predicting the dynamics of this behavior is an important question in finance and society, which is why we thought it was important to work on this topic.”

Quraishi is planning a career in applied mathematical modeling and interdisciplinary research in the physical sciences. Undergraduates Alex Kaplan and Sarah Yacoub, and 2019 graduate Christine Deeb (M.A. mathematics-applied mathematics), also worked on the project.

“This project gave me insight into what areas of research I can extend my knowledge of applied mathematics and strengthened my skills in programming,” Quraishi said. 

While Verdugo believes cryptocurrencies are here to stay, the public may not fully embrace digital money into the future.

“Expert opinions differ significantly regarding their daily use and ubiquitous acceptance by purchasers and vendors,” he said. “Until the public truly understands how they work, their economic benefits and financial drawbacks, it will be hard to consider cryptocurrencies as an official alternative in our society.”