Abstract
Most previous studies on cryptocurrency market efficiency focus on time evolution without identifying driving factors. This study examines the time-varying efficiency of Bitcoin and Ethereum—the two largest cryptocurrencies—and their efficiency drivers using:
- Daily data (August 7, 2016–February 15, 2023)
- Adjusted Market Inefficiency Magnitude (AMIM) measure
- Quantile regression
Key Findings:
- Time-varying (in)efficiency for both Bitcoin and Ethereum.
- Global financial stress negatively impacts AMIM across all quantiles.
- Cryptocurrency liquidity consistently enhances efficiency.
- COVID-19 pandemic increased market inefficiencies.
Introduction
Cryptocurrencies have surged past $1 trillion in market capitalization (2023), attracting investors due to their volatility and hedging potential. Despite growing research, results on market efficiency remain mixed:
- Efficiency Supporters: Bitcoin shows efficiency (Urquhart, 2016; Nadarajah & Chu, 2017).
- Inefficiency Advocates: Young markets like Bitcoin exhibit inefficiencies (Cheah et al., 2018).
This study addresses gaps by:
- Using time-varying AMIM to assess efficiency dynamically.
- Identifying drivers (liquidity, financial stress, COVID-19 impacts).
Literature Review
Key Studies:
- Efficiency: Khuntia & Pattanayak (2018) found Bitcoin adapts to market changes.
- Inefficiency: Alvarez-Ramirez et al. (2018) showed Bitcoin alternates between efficiency periods.
Adaptive Market Hypothesis (AMH):**
Cryptocurrency efficiency evolves with investor experience and market maturity (Noda, 2021).
Data & Methodology
Data Sources:
- Bitcoin/Ethereum Prices: CoinMarketCap (2,384 daily observations).
- Variables: Financial stress (FSI), liquidity (LIQ), COVID-19 dummy.
Methods:
- AMIM Calculation: Overlapping 1-year windows.
- Quantile Regression: To test drivers at different efficiency levels.
Results
Efficiency Trends:
- Bitcoin: More efficient (40% of sample).
- Ethereum: Less efficient (20% of sample).
Key Drivers:
| Factor | Bitcoin | Ethereum |
|----------------------|---------|----------|
| Financial Stress | Negative | Negative |
| Liquidity | Positive | Positive |
| COVID-19 | Increased inefficiency | Increased inefficiency |
Figure: AMIM values show efficiency shifts during crises (e.g., COVID-19).
Conclusion
- Efficiency is time-sensitive, improving with market maturity.
- Liquidity and financial stress are critical drivers.
- COVID-19 disrupted efficiency, highlighting external shocks’ impact.
Policy Implication: Regulators should monitor liquidity and stress indicators.
FAQs
Q1: How does liquidity affect cryptocurrency efficiency?
A1: Higher liquidity reduces inefficiencies by improving market depth and information flow.
Q2: Why is Bitcoin more efficient than Ethereum?
A2: Bitcoin’s longer market presence and higher liquidity contribute to stability.
Q3: Did COVID-19 permanently damage crypto efficiency?
A3: No—efficiency recovered post-pandemic, showing market adaptability.
👉 Explore cryptocurrency trends
Keywords: Bitcoin, Ethereum, market efficiency, AMIM, liquidity, financial stress, COVID-19, quantile regression
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