On the evolution of cryptocurrency market efficiency

ABSTRACT

This study examines whether the efficiency of cryptocurrency markets (Bitcoin and Ethereum) evolve over time based on the adaptive market hypothesis (AMH). In particular, we measure the degree of market efficiency using a generalized least squares-based time-varying model that does not depend on sample size, unlike previous studies that used conventional methods. The empirical results show that (1) the degree of market efficiency varies with time in the markets, (2) Bitcoin’s market efficiency level is higher than that of Ethereum over most periods, and (3) a market with high market liquidity has been evolving. We conclude that the results support the AMH for the most established cryptocurrency market.

KEYWORDS:

• Cryptocurrency Markets
• adaptive Market Hypothesis
• efficient Market Hypothesis
• GLS-Based Time-Varying Model Approach
• degree of Market Efficiency

JEL CLASSIFICATION:

• G12
• G14

Acknowledgments

The author would like to thank the Co-Editor, David Peel, an anonymous referee, Mikio Ito, Tatsuma Wada, and the conference participants at the 94th Annual Conference of the Western Economic Association International for their helpful comments and suggestions. The author is also grateful for the financial assistance provided by the Murata Science Foundation and the Japan Society for the Promotion of Science Grant in Aid for Scientific Research, under grant numbers 17K03809, 17K03863, 18K01734, and 19K13747. All data and programs used are available upon request.

Disclosure statement

No potential conflict of interest was reported by the author.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ The historical data for total market capitalization are available at the web page of CoinMarketCap (https://coinmarketcap.com/charts/).

² As described in Malkiel (1992, 739-744), markets are said to be efficient in the weak-form sense if the information set only includes the history of prices or returns.

³ See Ito, Noda, and Wada (2014, 2016) and Noda (2016) for details.

⁴ See Lim and Brooks Lim and Brooks (2011) for details.

⁵ In a different context, Lim and Kim (2011) and Noda (2016) show that trade openness is associated with the market efficiency of stock markets.

Additional information

Funding

This work was supported by the Japan Society for the Promotion of Science [17K03809,17K03863,18K01734,19K13747]; Murata Science Foundation [H30GH26].