On the Evolution of Cryptocurrency Market Efficiency

TL;DR

This paper investigates how cryptocurrency market efficiency, specifically for Bitcoin and Ethereum, changes over time using a novel time-varying model, finding that efficiency varies and is higher for Bitcoin, supporting the adaptive market hypothesis.

Contribution

Introduces a generalized least squares-based time-varying model to measure cryptocurrency market efficiency without sample size dependence.

Findings

Market efficiency varies over time.

Bitcoin's efficiency is generally higher than Ethereum's.

High liquidity markets show evolving efficiency levels.

Abstract

This study examines whether the efficiency of cryptocurrency markets (Bitcoin and Ethereum) evolve over time based on Lo's (2004) 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.