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Bitcoin and Efficient Market

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    Fama (1970) defines Efficient market hypothesis (EMH) as a theory whereby the asset prices reflect all the information present in the market and is available to all the market participants. According to this statement, the markets should correctly estimate the true value of Fintech product like Bitcoin. But this is not true since Tomasa et al (2018), Urquhart (2016), Caporale et al (2018) and Fink et al (2014) have concluded that investors are able to make abnormal profits stating that the Bitcoin market is not efficient. Literature also states that there exists anomaly of days of week returns because of the higher returns on Monday as compared to the other days allowing the investors to use strategies to earn extraordinary profits. Bartos (2015), Nadarajah et al (2017) and Kaiser (2018) are of the view that bitcoin market does not provide investors the opportunity to gain abnormal profits and that they are in line with the EMH. It has been found that Urquhart (2016), Bariviera (2017) and Kurihara et al (2017) are of the view that although Bitcoin is not efficient, there are improvements in the results which indicates that may be efficiency in the future.

    The remainder of this report is organised as follows. Section II talks about the case study of EMH and Bitcoin, Section III contains the theoretical positioning of EMH and Bitcoin and Section IV concludes the report.

    Case Study

    Cryptocurrency is a form of digital currency which uses different methods to safeguard the transactions and generation of new units of currencies. They operate independently without any central authority. Bitcoin is also a form of online digital cryptocurrency which facilitates electronic payments (Bohme, 2015). It has received a lot of attention due to its innovation and simplicity. But the volatility of the Bitcoin is higher than as compared to that of other currencies and gold (Dwyer, 2015). Latif et al (2017) state that one of the major problems of cryptocurrency like Bitcoin is the volatility in the prices. Because of this high volatility, there is unpredictability and also a lot of fluctuations in their prices (Kim et al, 2016). Thus, this usually raises a question regarding the true intrinsic value of Bitcoins and whether this kind of market is consistent with the EMH.

    Fama (1970) state that an asset always trades at their fair value in an efficient market making it impossible for an investor to earn abnormal profits. He differentiates the markets into three forms of market efficiency based on the information pertained in the stock price but for this case study only the Semi-Strong form of market is been considered which believes that the price contains all the information that is public in the market. Rossi et al (2018) adds that a market is usually stated to be efficient if the prices of the assets quickly adjust to the new information and the past information is already pertained in the stock price. So, it is not possible to beat the market since the prices are not low or high but already at their fair value.

    Theoretical Position

    According to the EMH, financial markets always correctly estimate the true value of Financial products like Bitcoins. But this might not be true. There are pieces of literature stating that the market of Bitcoin is still inefficient and that the market does not reflect its fair value.

    To analyze the effect of semi-strong efficiency in bitcoin considering the monetary policy and bitcoin news market, Tomasa and Ibanez (2018) found out that Bitcoin is inefficient when considering the monetary policies since it does not tend to repose to such kind of news or change in the government policies. So, it can be said that the investors investing in cryptocurrency are actually investing in an asset which is not controlled by the government or the central banks. But the authors concluded that Bitcoin does many a time respond to its own news, proving that it is sometimes efficient and they state that it can be more efficient as time passes.

    Urquhart (2016) carried out tests to examine the efficiency of Bitcoin and considered two subsample period by splitting the sample so as to get a better understanding of the variation in the efficiency of Bitcoin. Their work concluded that when the full sample is considered, the results rejected the weak form of efficiency indicating the inefficiency in Bitcoins. The author states that it is not surprising that Bitcoin is inefficient since it is still a new product and in its early development stage. Also, it has been found that when considering the subsamples, although inefficiency is found in both the samples, there is less inefficiency in the latter period as compared to the first sample. So, it can be stated that the Bitcoin market is becoming more efficient as more investors trade in it. In order to study the dependence of Bitcoin returns to volatility, Bariviera (2017) used data from the period 2011 to 2017 by using the Hurst exponent methodology. The results generated by him had evidence to state that from the period 2011 to 2014, the returns showed persistence, but after 2014, the returns show stabilization showing evidence that the market is moving towards efficiency as time passes.

    An investor can gain opportunity to earn abnormal profits if they are able to predict the price or the movement in the market which is against and in contradiction to the Efficient market hypothesis. So, to check the predictability of the cryptocurrency market, Caporale et al (2018) examined the returns of the most used cryptocurrency i.e. Bitcoin from the period of 2013 to 2017 by using the long memory method, a technique used to analyse the time series data. Their results concluded that predictability is more in the crypto market and so it can form basis for the investor to apply any strategy to earn extraordinary profits. Test of variance ratio and run test performed by Fink and Johann (2014) to find the price efficiency of bitcoin markets have their results to indicate to reject the null hypothesis, stating that the returns of Bitcoin do not follow random walk. Therefore, it can be concluded that the Cryptocurrency market is still inefficient and so is the Bitcoin market.

    To examine the of days of the week anomaly in the cryptocurrency markets, tests have been performed by Caporale and Plastun (2017), Decourt et al (2017) and Kurihara and Fukushima (2017). Caporale et al (2017) using statistical analysis techniques on the cryptocurrencies like Bitcoin, Litecoin, Ripple and Dash and to examine the anomaly in this market concluded that cryptocurrencies other than bitcoin don’t show presence of such anomaly of days of week but it has been found that Bitcoin had significantly higher returns as compared to the other days of the week giving the investors, the opportunity to make profits. Also, in the research carried out by Kurihara and Fukushima (2017) on the anomaly of Bitcoin as their cryptocurrency, found that Bitcoin market is not efficient since there exists an anomaly of prices of Bitcoins on weekends, maybe because of the low volume of the trading in these days. Therefore, there are high chances for the investors to use their trading strategies and earn the abnormal gains exploiting the general rule of Efficient markets. But, it has been noted that the anomalies which were identified seemed to be less in the later time period. Also, in process of examining the returns generated by bitcoins under the calendar time by analysing the returns on a daily basis, Decourt et al (2017) came to the conclusion of the anomaly of returns on Monday. The returns yield on Monday was comparatively higher as compared to other days. This anomaly indicates and provides evidence to prove that there exist inefficiency in the Bitcoin market.

    On the other hand, there are literature supporting the statement that Financial innovation like Bitcoin does follow the efficiency of the market. Bartos (2015) used the Error Correction model on a daily basis for one year from 2013 to 2014 to find whether there exists a relation between the prices of the Bitcoin and the news feeds or announcements. Their results concluded that Bitcoins do react to the public news and that the prices of bitcoin were much higher in a positive event and much lower in an event of negative news. According to the efficient market hypothesis, the prices of bitcoin should reflect all the information and therefore the change in the prices of bitcoin reacting to the news announcements prove the point that Bitcoin do follow the hypothesis of efficient market.

    Nadarajah and Chu (2017) analyzed the returns data of Bitcoin from 2010 to 2015 in order to find the efficiency in the Bitcoin market. Eight tests were adopted by them to find the efficiency of the market and majority of the tests provided the results that the returns were independent of each other, stating that no abnormal profits could be made by the investor in bitcoin market. Also, Kaiser (2018) tested the daily data for Bitcoin in order to test whether there exists a seasonality pattern in their returns which would allow the investors to make abnormal profits. He tested to check for the Monday effect, the turn of the month effect and the Halloween effect. Although he stated that there was presence of the Monday effect in the bitcoin market but no seasonal patterns of robust level were detected in the returns data. He also concluded that considering the overall data and results, the efficient market hypothesis in its weak form cannot be rejected for the bitcoin data.

    Therefore, there is still ambiguity whether EMH help to identify the true value of Bitcoin market because some literature state that Bitcoin market is inefficient since it allows the investors to gain abnormal profits and exploit the theory of efficient market in which it is not possible for the investor to make profits. But on the other hand, some authors conclude that investors cannot make profits in Bitcoin markets as no seasonality pattern exist and the price of the bitcoin reflect the effects of announcements and news following the concept of EMH.


    On evaluating a number of academic papers, it still cannot be concluded whether the market of Cryptocurrency, especially Bitcoin, hold the concept of EMH and whether market hypothesis helps to estimate the true value of Bitcoins. As stated by EMH, an investor is not able to make profits from the markets since the assets trade at their intrinsic value. But there are evidence in the literature stating that the investors can make extraordinary profits by using trading techniques in the Bitcoin markets. Bitcoin prices do not respond to the change in the monetary prices and also the price predictability for Bitcoins is more giving chance to the investors to make profit opportunities. Also on testing the day of the week anomaly, it has been proved that the price of the bitcoin have been significantly higher on Mondays as compared to the other days, showing inconsistency of the markets. But there also exist literature that state that the prices of Bitcoins are affected when the announcements are made regarding bitcoin reflecting the new information and that investors cannot make profits since the returns were independent of each other Also, it has been noted that although the earlier period of the sample showed signs of inefficiency, there have been improvement in the Bitcoin markets showing evidence that the market is moving towards efficiency and in the future, it might be more efficient. So, although there are more number of literature supporting that Bitcoins do not hold the efficiency of market hypothesis, there is no definite answer whether it correctly estimates the true value of Bitcoin.

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