Cryptocurrencies and Market Efficiency: Investigate The Implications of Cryptocurrencies On Traditional Financial Markets and Their Efficiency

Volume 9, Issue 8, August – 2024 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24AUG810
Cryptocurrencies and Market Efficiency: Investigate

the Implications of Cryptocurrencies on Traditional
Financial Markets and their Efficiency
Roland Akuoko-Sarpong1; Stephen Tawiah Gyasi2; Hannah Affram3
1,2
Department of Economics, Ohio University
3
Department of Accounting, University of Cape Coast
Abstract:- The creation of cryptocurrencies has signified However, cryptocurrency markets are also surrounded
many consequences for financial markets of the by criticism and doubts regarding their long-term
traditional kind and their effectiveness. This research sustainability, linkages to real economic activity as well as
seeks to explore the effects of cryptocurrencies on a implications for monetary policymaking. Volatility,
number of the other traditional markets in aspects of speculative bubbles, anonymity concerns, and the
price discovery, volatility, interdependence, and unregulated nature of crypto exchanges have led regulators
information transmission. Event study analysis of worldwide to monitor these developments cautiously (Bien &
everyday price changes and using multivariate Oanh, 2021; Toan, 2021). It also remains debatable if
cointegration analysis to cryptocurrencies and the cryptocurrency prices reflect all available information
evidence is that the cryptocurrencies are inefficient as efficiently as in mature financial markets or are driven more
characterized by irrational behavior, bubbles, and by behavioral factors and hype (Chowdhury & Stasi, 2022).
erratically fluctuating volatilities. However, they affect a From an economic perspective, it is important to understand
range of currency, commodity, and stock market indexes how these virtual currencies interact with and influence more
by showing return and volatility spillover effects conventional currencies, commodities, and stock indices
suggesting information flowing from one market to globally.
another. Alnet, cryptocurrency markets seem inefficient
on their own but over time enhance the efficiency of linked This study aims to shed light on the implications of
traditional markets through participation and cryptocurrencies on the efficiency of traditional financial
connectivity of global financial systems. The study markets through a comprehensive empirical investigation. In
contributes valuable insights into the evolving nature of the introductory section, relevant background to
financial markets in the digital era through discussions on cryptocurrencies, blockchain technology, and market
market structure, behavioral factors, and policy efficiency concepts are presented. Following this, specific
implications. research objectives are outlined to analyze price dynamics,
volatility spillovers, and cointegration linkages between
Keywords:- Cryptocurrencies, Market Efficiency, Price cryptocurrency and traditional asset markets during the
Dynamics, Volatility Spillovers, Event Study, Cointegration. sample period. The study employs rigorous econometric tools
including event study methodology and multivariate
I. INTRODUCTION AND BACKGROUND cointegration techniques on daily price data. This would help
determine the informational efficiency and integration of
A. Introduction cryptocurrency markets with other linked markets over time.
The innovation of blockchain technology and the rise of Insights gained would be valuable for financial regulators,
cryptocurrencies has brought disruptions to traditional investors, and policymakers to understand the evolving
models of money and finance. With no central authority or interplay between digital and conventional finance in the
intrinsic value, cryptocurrencies operate on decentralized future.
peer-to-peer networks that facilitate cash-like transactions
through mathematical protocols (Wei, 2018). With the B. Study Background
phenomenal success of Bitcoin since 2009, hundreds of other
cryptocurrencies emerged over the years striving to transform  Cryptocurrencies and Blockchain Technology
payment systems worldwide. Today, digital currencies have a As per Chowdhury (2022b), cryptocurrencies can be
total market capitalization exceeding USD 1 trillion viewed as digital or virtual currencies that employ
(Chowdhury, 2022a). Proponents argue that cryptocurrencies cryptography for security and operate on distributed peer-to-
have the potential to increase financial inclusion, offer peer networks with no central authority. They use blockchain
cheaper cross-border remittances as well as store value technology which is a decentralized digital ledger consisting
propositions over fiat currencies vulnerable to inflation (Anh, of an ongoing list of ordered records called blocks. Each
2018; Phuoc, 2020). block contains a cryptographic hash of the previous block, a
timestamp, and transaction data (Chowdhury et al., 2022).
This structure binds the blocks together in a tamper-proof
IJISRT24AUG810 www.ijisrt.com 1659

chain where new transactions are recorded and added in Chowdhury, 2022). While diversification benefits may accrue
batches after validation through consensus mechanisms. to investors from holding crypto assets, risks abound from
sudden volatility shocks and crashes without any intrinsic
Bitcoin, the first and largest cryptocurrency launched in backing as well (Chowdhury & Stasi, 2022b).
2009, utilizes a proof-of-work system where "miners"
validate transactions by solving complex cryptographic  Behavioral Factors and Herding Behavior
puzzles. They are rewarded with new Bitcoins for Unlike some tradable assets, both organizational
maintaining the integrity and security of the blockchain antecedents and cognitive factors explain cryptocurrency
network (Chowdhury, 2021). Over the years, many other price movements other than the sentiment. In their studies
popular cryptocurrencies emerged including Ethereum, done on the effects of emotions like happiness, anxiety, and
Tether, Ripple, Litecoin, Dogecoin, etc. having alternative sadness on bitcoins, Yu et al., affirm that emotions elicited
consensus protocols (Vu, 2020). Proponents argue that from social media posts and comments were harmful to
blockchain provides public digital ledgers offering trust, Bitcoin's returns on some days as identified by Yousaf et al.
transparency, and immutability without intermediaries Naeem et al. (2021) in an echo event study of the Covid-19
(Chowdhury & Stasi, 2022). This has led to diverse pandemic also evidence flight to safety sentiments herding
applications beyond payments in areas like smart contracts, behavior towards bitcoin. Hence, the speculation and
decentralized finance, and non-fungible tokens (NFTs) sentiments or sentiment of the retail investors do appear to
(Chowdhury, 2023). reign every once in a while and lead to short-term fluctuations
in the crypto markets.
 Market Efficiency
Market efficiency refers to the degree to which market More research done by Shahid et al (2020) and Zhang
prices reflect all available information and the speed at which and Wang (2021) on herding in cryptocurrencies examined
new information gets impounded into prices (Anh, 2018). the daily transactional herding in cryptocurrency during a
According to Fama's (1970) efficiency hypothesis, financial financial turmoil period. Based on their research, they argue
markets can operate in various forms - weak, semi-strong, and that in situations where there are high macroeconomic risks,
strong. Weak-form tests if historical price and volume data market agents self-organize in a manner that sees them
alone cannot be used to earn excess returns. Semi-strong form emulate similar trading biases. This is destabilizing for
postulates that all public information is instantly reflected in markets through the societies, feedback loops, and crashes
market prices leaving no opportunities for abnormal profits. that it furthers. Also, due to the absence of burton-investment-
Strong form assumes even insider information is fully anchors, ContextHolder investors can run amok and over-
reflected in market prices (Chowdhury, 2017). emphasized liquidations can be more pronounced compared
with conventional equities.
Over the years many empirical studies have analyzed
the efficiency of major currency exchange rates, commodity In addition, as indicated by Antonakakis et al. (2019),
futures, stock indexes as well as the cryptocurrency market structural features in the cryptocurrency probably exacerbate
using techniques like random walk tests, variance ratio tests, informational cascades too. It may increase the extent of
and event studies (Chowdhury & Rozario, 2018; Al-Yahyaee, mimicking behaviors since traders cannot see their
et al., 2018; Chowdhury, 2020b). While conventional markets counterparts due to the anonymity of transactions. Together
exhibit characteristics of semi-strong efficiency, with such biases as representativeness and availability
cryptocurrency markets are still evolving with mixed heuristics, this can amplify distorted valuation signals across
evidence of irrational exuberance, bubbles, and inefficiencies decentralized exchanges (Shah et al., 2018). Hence,
at times (Chowdhury, 2020a; Wei, 2018). Their volatile price coordination is detrimental to the adaptive rationality of
movements driven more by behavioral factors underline the crypto markets by irrationality on the upside as well as the
uncertain regulatory environment as well (Chowdhury, downside.
2022c).
C. Aims and Objectives
 Cryptocurrency Prices and Volatility The purpose of this empirical research is to analyze both
Past researches show cryptocurrency returns like the increased efficiency and interconnectedness of traditional
Bitcoin exhibit 'stylized facts' common to financial time financial markets due to cryptocurrencies using the daily
series including leptokurtosis, volatility clustering, and non- price data for 2014-2022. The specific objectives are:
normal distributions (Nadarajah & Chu, 2017; Vidal-Tomás
& Ibañez, 2018). Bitcoin and altcoin prices are known to  To analyze irrational exuberance and bubble periods in
fluctuate widely based on technology upgrades, media major cryptocurrency markets using event study
coverage, regulatory actions as well as sentiments around methodology around certain events.
adoption and usage levels (Chowdhury & Chowdhury, 2022).  To examine volatility spillovers and return dynamics
Cryptocurrency volatility tends to rise during periods of between Bitcoin/Ethereum prices and key currency
uncertainty which impacts risk perception (Chowdhury & exchange rates, commodity prices as well as global stock
Dhar, 2022). Some studies found bidirectional volatility market indices.
spillovers between cryptocurrencies and currencies,
commodities as well as stock indices hinting at integration
across markets (Chiriță et al., 2022; Chowdhury &

 To test for long-run equilibrium relationships and degree II. LITERATURE REVIEW
of cointegration between cryptocurrency and traditional
asset markets by applying multivariate cointegration A. Market Efficiency and Informational Efficiency of
techniques. Cryptocurrencies
 To draw inferences on the informational efficiency and The term market efficiency refers to the incorporation
integration of cryptocurrency markets with linked and reflection of all available information into asset prices in
traditional exchanges and how they have evolved over the the market. Researchers have examined the market efficiency
sample period. of cryptocurrencies using techniques such as unit root tests,
 To discuss policy implications and recommendations for variance ratio tests, ARCH/GARCH models, etc. However,
regulators, investors, and other stakeholders given the findings have been mixed. For example, Nadarajah and
disruptions from digital currencies. Chu (2017) found bitcoin returns to be predictable and
rejected the random walk hypothesis, implying market
D. Statement of the Problem inefficiency. On the other hand, Vidal-Tomás and Ibañez
While cryptocurrencies promise revolutionary benefits (2018) found bitcoin returns to exhibit semi-strong form
by enabling decentralized peer-to-peer value transfer efficiency. In terms of informational efficiency, recent studies
globally, their advent has raised uncertainties for such as Khan (2019) have indicated that cryptocurrencies
policymakers, market participants, and financial stability. respond to fundamental as well as speculative non-
Core questions remain around their interactions with and fundamental information. During periods of high volatility
impact on traditional monetary and banking systems such as the COVID-19 pandemic, some research notes
functioning for decades. Cryptocurrency markets exhibit evidence of herding behavior by cryptocurrency investors
highly volatile speculative swings not backed by any real (Yousaf et al., 2021). The mixed findings on market and
economic activity. Yet, their rising popularity and total market informational efficiency indicate that cryptocurrency markets
valuation command attention for systemic linkages through may exhibit both efficient and inefficient properties at
information, liquidity, and volatility spillovers across different periods.
international borders. It is therefore important to
comprehensively investigate and understand how The descriptive statistics presented in Table 1 provide
cryptocurrency prices evolve individually as well as co-move some useful insights regarding market efficiency. It can be
with major currencies, commodities, and stock indices over seen that the average daily returns range from 0.25% for
time using rigorous empirical tools. This would aid informed Bitcoin to 0.70% for EOS, with standard deviations between
policy decisions regarding the adoption of blockchain 4.36% for Bitcoin to 11.28% for EOS. These high volatility
technologies or regulation of cryptocurrency markets and levels imply potential predictability in returns. Furthermore,
exchanges amid evolving digital finance. The present study positive skewness and excess kurtosis are present in the
aims to address such knowledge gaps and provide valuable distributions, particularly for EOS, LTC, and XRP. This
insights to stakeholders. indicates fatter tails and more frequent extreme returns
compared to the normal distribution. Such stylized facts are
inconsistent with random walk-type market efficiency by
several studies such as Al-Yahyaee et al. (2018) for Bitcoin.
However, further tests are required to reach definitive
conclusions regarding the exact degree and nature of
(in)efficiency for different cryptocurrencies over time.
Table 1: Summary Statistics of Daily Simple Returns for Five Major Cryptocurrencies
Crypto n mean sd median min max skew kurtosis SE
BTC 2132 0.25% 4.36% 0.18% -23.37% 42.97% 0.50 9.94 0.00
EOS 607 0.70% 11.28% -0.20% -31.96% 168.32% 5.99 80.83 0.00
ETH 1301 0.58% 7.29% -0.09% -72.80% 51.03% 0.27 13.13 0.00
LTC 2132 0.35% 7.34% 0.00% -40.19% 129.10% 4.77 65.90 0.00
XRP 2034 0.51% 8.75% -0.29% -46.00% 179.37% 6.12 99.47 0.00
Table 1 above presents summary statistics of daily return characteristics also suggest currencies experience
returns for five major cryptocurrencies - Bitcoin, Ethereum, different degrees of speculative sentiment impact (Chen et al.,
Ripple, Litecoin, and EOS over the period from April 2013 to 2022; Lo & Wang, 2014). The descriptive analysis helps
February 2019. It provides insights into the return properties understand the complex interplay between fundamental
that can indicate the roles of fundamentals versus behaviors transaction demands and noise trader effects highlighted in
in driving cryptocurrency prices as discussed earlier (Gandal the empirical literature.
& Halaburda, 2014; Kristoufek, 2018). The large standard
deviations, positive skewness and excess kurtosis for some B. Impact of Cryptocurrencies on Traditional Financial
currencies like EOS, LTC, and XRP compared to normal Markets and Their Efficiency
distributions are consistent with price bubbles driven by herd The emergence of cryptocurrencies has implications for
investment (Khamisa, 2019). This affirms the influence of traditional financial markets and their efficiency as well.
behavioral factors over rational pricing models. The varying Several studies (Vu, 2020; Erdas & Caglar, 2018; Almansour

et al., 2020; Zhang & Wang, 2021) have found bidirectional trade size are seen improving bitcoin price discovery (Wei,
causal linkages and return spillovers between cryptocurrency 2018). However, the model fits incorporating only
prices and various traditional assets. For example, bitcoin transactional fundamentals can be quite low (Hayes, 2017).
returns are found to Granger-cause gold, oil, and some This indicates additional non-fundamental speculative and
currency prices. Likewise, exchange rates and commodity behavioral factors at play. Technical indicators relating to
prices provide information to predict bitcoin returns. Such momentum, volatility, and trading patterns also help explain
cross-market linkages imply transmitted volatility and loss of part of cryptocurrency return predictability (Kristoufek,
diversification benefits. Some volatility spillovers have also 2018; Blau, 2018).
been documented between cryptocurrencies and stocks
during periods of market turmoil like the 2020 pandemic Some studies argue that purely rational valuation based
(Naeem et al., 2021). There is evidence that cryptocurrencies on usage fundamentals cannot logically justify extreme
have increased cross-market co-movements and inter- boom-bust cycles witnessed in cryptocurrency prices
linkages, challenging the notion of segmentation between historically (Cheah & Fry, 2015). Behavioral factors like
traditional and emerging digital finance spheres. bubble formation, herding, and feedback effects are seen
better in explaining steep run-ups and crashes (Kristoufek,
Some studies argue that increased interaction and 2018; Yu et al., 2019). For example, Yu et al. (2019) found
information flow between cryptocurrency and traditional differing impacts of user interest versus opinions on bitcoin
market players have promoted the incorporation of volatility, highlighting noise trading impact. Using predictive
cryptocurrency news and return shocks into stock and Forex models, Hayes (2017) also estimated Bitcoin's fair price
prices at a higher frequency (Wei, 2018; Nan & Kaizoji, 2019; based on production costs to be about a tenth of peak market
Bariviera, 2017). For example, Wei (2018) finds prices in late 2017, questioning sustainability. Research
cryptocurrency liquidity helps improve FX market efficiency. suggests cryptocurrency returns embed both rational
By facilitating arbitrage, cryptocurrencies may also reduce fundamental components tied to usability drivers as well as
mispricing and ensure traditional asset prices better reflect all speculative behavioral distortions at different times.
available information on a real-time basis. However, others
note that heavy-tail dependencies and time-varying The descriptive statistics in Table 1 also provide clues
volatilities in cryptocurrency return spillovers (Antonakakis on the roles of fundamentals versus behaviors. For example,
et al., 2019; Otoo & Nemati, 2017) violate assumptions of the large standard deviations and thick tails are consistent
stable linkages required for pure efficiency gains. In addition, with price bubbles driven by retail herd investment noted
the potential for larger illiquidity-driven swings in during the 2017-early 2018 period (Khamisa, 2019).
cryptocurrency prices poses challenges for traditional Furthermore, the divergence in return properties across
investors hedging exposure through short-term arbitrage currencies like higher mean, skewness, and kurtosis for
trades. EOS/LTC versus bitcoin suggests varying degrees of
influence from speculative sentiment versus transactional
Empirical evidence on how cryptocurrencies may have value drivers. Studies argue that monetary demand
impacted the market efficiency of traditional assets is limited determined mainly by risk-return characteristics attracts more
and mixed. Using variance-ratio tests on high-frequency FX speculative flows into smaller and younger currencies
exchange rates, Vidal-Tomás and Ibañez (2018) found little (Gandal & Halaburda, 2014). Empirical evidence documents
effect of bitcoin trading on narrowing mispricing in major the combined but time-varying impacts of both usage-linked
currency pairs. However, Blau (2018) documented increased real factors as well as noise trading and non-rational
common factor decomposition between cryptocurrencies and emotional factors in return formation across cryptocurrency
commodities/currencies over 2016-17, implying improved assets.
diversification. Meanwhile, market efficiency studies
controlling for cryptocurrency news/volume spillovers have D. Impact of Cryptocurrencies on Monetary Policy
reported both increases (Wei, 2018 for FX) as well as Effectiveness
decreases (Nadarajah & Chu, 2017 for S&P500) in test The widespread adoption of cryptocurrencies also has
statistics compared to benchmark models. While ramifications for monetary policy transmission and control.
cryptocurrency introduction has facilitated information flows Some studies argue that alongside legal tender, electronic
across market segments, its net impact on efficiency may be money alternatives can pose challenges to central bank rate
ambiguous depending on the dominance of short-term policy and inflation targeting (Khalaf, 2018; Feyen et al.,
arbitrage gains versus long-term noise trader/volatility 2020). For example, with the Libra project, market
effects. participants fear its scale may allow the bypassing of
domestic currency for remittances and payments in some
C. Role of Fundamental and Technical Factors in regions (Anh, 2019; Fatas & Mauro, 2019). This could
Cryptocurrency Returns and Pricing undermine seigniorage revenue and lower money multiplier
Studies have also attempted to identify key factors effects crucial to policy impact (Phuoc, 2020). Moreover,
driving cryptocurrency price behavior and return formation. cryptocurrencies providing asset diversification during
Fundamentally, transaction volumes, adoption rates, and unstable monetary periods may weaken the impact of policy-
usage statistics are found to significantly influence driven interest rate adjustments on aggregate demand (Vu,
cryptocurrency prices in the short as well as long run (Hayes, 2020). However, others note the limited impact so far given
2017; Cheah & Fry, 2015). Liquidity measures like average

their current small scale versus broad money (Bordo & Most scholars argue a balanced regulatory approach is
Wheelock, 2007; Thoa, 2017). needed to curb risks while allowing innovation (Chen et al.,
2022; Lo & Wang, 2014). Suggested measures include
Empirical studies on the monetary policy nexus have registration of service providers, transaction monitoring,
provided mixed results. Using GARCH-class models on high- taxation of gains, and setting standards for consumer
frequency Bangladeshi data, Almansour et al. (2020) found disclosures. Some support certain currencies attaining legal
two-way volatility spillovers between Bitcoin and domestic tender status if meeting stability criteria (Santos, 2021).
interest rates, signifying some degree of interdependence. International coordination is also viewed as critical to curbing
However, Granger-causality tests detected little explanatory regulatory arbitrage across fragmented regimes (Sy, 2022).
power of policy rates on cryptocurrency prices. Similarly,
BTC returns were found insensitive to US/China monetary Besides, as the ecosystem matures there are calls for a
policy surprises (Zhang & Wang, 2021). On the other hand, comprehensive global framework overseen by standard-
bitcoin volatility responded positively to global financial setting bodies like the FSB and BIS (Hacker & Thomale,
stress periods as measured by VIX (Ghazani & Jafari, 2021). 2018). This could establish common rules on aspects like
This implies cryptocurrencies acting partly as a haven, AML, market integrity, and resolution mechanisms.
weakening the stabilizing impact of counter-cyclical Domestic licensing of approved currencies aligned to agreed
monetary easing. Interactions appear limited currently but prudential norms is also proposed to balance oversight and
systemic risks may arise as digital assets grow in use, permissionless innovation (Dyhrberg, 2021). While
attracting greater linkages with conventional markets. uncertainties remain given the technology's evolving
trajectory, balanced regulation ensuring financial stability and
Looking ahead, the policy challenges will depend on protecting consumers seems likely to emerge over the long
cryptocurrencies’ future progress in displacing legal tender run.
and fulfilling monetary functions. Most experts argue
disruptions are unlikely in the foreseeable future (Thoa, 2017; III. DATA AND METHODOLOGY
Fatas & Mauro, 2019) as cryptocurrency use remains
concentrated in speculation and investment rather than A. Data
regular transactions. However, ongoing central bank digital Daily closing price data for Bitcoin and Ethereum was
currency research coupled with BigTech initiatives in collected from the website CoinMarketCap for the period
stablecoins indicate an accelerating digital transformation of between August 2016 to February 2023. This provided 2384
money. Whether this evolution undermines monetary daily observations for each cryptocurrency. Collecting daily
sovereignty or instead strengthens policy tools remains an price data over this period was important to capture various
open empirical question requiring continuous monitoring events in the cryptocurrency market that could impact prices.
(Kern, 2019; Tobias & Woolley, 2021). Current evidence does This period covered various important events in the
not point conclusively towards material constraints, but cryptocurrency market that could have impacted prices, such
cryptocurrencies’ rise warrants attention from regulators as the boom in prices in 2017 and the crash in Bitcoin prices
regarding financial stability and fiscal impacts. at the end of that year (BBC, 2014; Chen et al., 2021).
E. Emerging Regulatory Approaches and Potential for Firstly, some descriptive statistics and preliminary tests
Future Cryptocurrency Regulation on the daily return series of the stocks were performed for
Given the rapid growth and evolving impact of some fundamental examination and the tests of assumptions.
cryptocurrencies, regulatory approaches across jurisdictions The daily return was defined as the natural logarithm of the
are still evolving. Initially, many countries adopted a laissez- ratio of the closing prices. Table 1 provides the Descriptive
faire stance but risks of illicit use, investor protection Analysis where we have Mean, Standard Deviation,
concerns, and financial stability implications are now Skewness, and Kurtosis. Other pre-tests like the Jarque-Bera
prompting greater oversight (Garriga, 2021). The US takes an test and the unit root pre-tests were still conducted. This was
asset-specific approach while the EU seeks to establish a performed before proceeding to the next analysis to determine
common framework (Stern, 2021). Meanwhile, China has simple properties of the return distributions and also test for
banned cryptocurrency trading and mining outright. the stationarity of returns. Testing for the presence of unit root
using the Augmented Dickey-Fuller test as well as the
Philips-Perron test meant for testing the stationarity of the
return series which is a requirement for regression testing
showed that both return series are stationary (Yang et al.,
2020).

Fig 1: Daily Price and Logarithm of the Returns of both Bitcoin and Ethereum
Thus, to analyze the prices and their fluctuations during AMIM values. Both series were stationary as shown by the
the given period, Figure 1 presents the daily prices and the unit root test statistics in the table.
log return series of Bitcoin and Ethereum. Speculative pricing
intended to demonstrate significant upward and downward B. Testing Efficiency in a Time-Varying Framework
changes that were observed, for example, the sharp escalation Daily closing price and volume data were gathered for
in prices in the year 2017. Fluctuations in stock prices form the five largest cryptocurrencies by market capitalization over
trends that had to be de-trended by the logarithmic returns the period 2016 to 2023. This included Bitcoin (BTC),
into a stationary form. Their plotting helped to center on the Ethereum (ETH), Ripple (XRP), Litecoin (LTC) and EOS
patterns of volatility and contribute to studying the context, (EOS). Collecting extensive daily data on the top
within which key changes in prices occur. This preliminary cryptocurrencies allowed for analyzing important trends and
depiction of the data series provided important background events in the emerging crypto market.
for further empirical testing. Figure 1 depicts the daily prices
and logs returns of Bitcoin and Ethereum over the analyzed Figure 2 below presents two panels showing (a)
period. Bitcoin prices increased from around $650 in August normalized prices and (b) trading volumes of the selected
2016 to over $15,000 in December 2017 before declining, cryptocurrencies over time. To generate normalized prices for
while Ethereum prices rose from around $10 to over $1400 in analysis and comparison, the actual daily price of each
the same period before dropping. Both exhibited high currency was divided by its first observed price in the dataset.
volatility in returns (Ghazani & Jafari, 2021). This process transformed the price series into a dimensionless
form with the starting point set to one.
Figure 1 above further shows the summary statistics of
the AMIM measure of efficiency for Bitcoin and Ethereum. It Plotting normalized prices aimed to visually identify
can be seen that on average, Ethereum exhibited higher levels major periods of growth and decline in a standardized
of inefficiency compared to Bitcoin based on the mean manner. Figure 2 further depicts trends in the daily prices and
returns of Bitcoin and Ethereum over the analyzed period.

Fig 2 (a): Trading Performance of Major Cryptocurrencies from 2017-2019
 Normalized Price: This depicts the daily prices of that occurred in prices, such as during the 2017 bull run,
Bitcoin and Ethereum on the same normalized scale. This to understand trends and identify important events for
visualization aimed to show major increases and declines later analysis.
Fig 2(b): Trading Performance of Major Cryptocurrencies from 2017-2019
 Volume: This plots the daily trading volumes of Bitcoin

and Ethereum over the period. Including volume trends To test for efficiency over time, Le Tran and Leirvik's
aimed to provide context on price movements by showing (2019) Adjusted Market Inefficiency Magnitude (AMIM)
if significant price changes were accompanied by changes methodology was used. This involves estimating an
in trading activity. It helped characterize periods of Autoregressive (AR) model on returns as given by Equation
heightened market participation and fluctuations. 1 below.
𝑅𝑡 = 𝛼 + 𝜑1𝑅𝑡 − 1 + 𝜑2𝑅𝑡 − 2 +. . . + 𝜑𝑝𝑅𝑡 − 𝑝 + 𝜀𝑡 … … … … … … … (1)
Or
Rt t

i=1
To standardize the estimated coefficients (α), we
Where Rt is the return at time t, α is the constant, φ is decomposed the covariance matrix of the vector α using
AR coefficients, p is the number of lags and εt is the error Cholesky decomposition. Cholesky decomposition expresses
term. An AR model was chosen to see if past returns (Rt-1, a positive-definite matrix as the product of a lower triangular
Rt-2, etc) can explain current returns under efficient markets. matrix and its transpose. Specifically, the covariance matrix
Σ was decomposed as follows:
This time-varying approach captures potential non-
stationarity better than fixed-period tests. αstandard . ................................................................(4)
The efficient market hypothesis (EMH) suggests that in Σ = LL'

an efficient market, future price movements cannot be
predicted based on past price information (Lo, 2004). Where L and L' are lower triangular matrices. Le Tran
Therefore, if markets are efficient, the coefficients β1 to βq and Leirvik (2019) suggested using Cholesky decomposition
should be zero or statistically insignificant. Significant non- in the first stage of developing their market efficiency
zero coefficients would indicate market inefficiency. measures. This decomposition helps to standardize the
estimated coefficients (α). The standardized coefficients
To determine the appropriate number of lags (q) for the (αstandard) can be obtained from:
autoregressive model, the Akaike Information Criterion
(AIC) is employed. This criterion helps select the optimal 𝛼𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 = 𝐿 − 1𝛼
model that balances goodness of fit with model complexity.
The Cholesky decomposition of the covariance matrix
In an efficient market, the autoregressive coefficients allows the estimated coefficients to be standardized. This is
(α1, α2, ..., αp) should be statistically insignificant. The important for calculating the magnitude of market
coefficients are estimated using Ordinary Least Squares inefficiency (MIMt) and the adjusted market inefficiency
(OLS), with the asymptotic distribution of the estimated magnitude (AMIMt), as these measures require standardized
coefficient vector α̂ given by: coefficients as inputs. By standardizing the coefficients, we
can account for the variability and correlations between them.
𝑀√𝑇(𝛼̂ − 𝛼)~ 𝑁(0, 𝛴) … … … … … … … … … … … … … . . (2)
Asymptotically, the standardized vector (αstandard)
Where βˆstandard represents the standardized obtained from the Cholesky decomposition will follow a
autocorrelation coefficients, obtained by multiplying the normal distribution. Specifically:
estimated coefficients (βˆ) by the inverse of the Cholesky
decomposition (L−1) of the asymptotic covariance matrix Σ. Where N represents the normal distribution and I is the
identity matrix.
The MIM measure sums up the absolute values of the
standardized autoregression coefficients, indicating market Stating this condition explicitly, we have:
inefficiency. In a strongly efficient market, the MIM should
be statistically indistinguishable from zero. αstandard ∼ N (0, I) .................................................................(5)
To enhance the robustness of the inefficiency measure where I denote the identity matrix. Second, Le Tran and
and reduce the impact of insignificant parameter estimates, Leirvik (2019) introduce the magnitude of market
the study introduces the Adjusted Market Inefficiency inefficiency (MIMt), defined as follows:
Magnitude (AMIM):
(𝑀𝐼𝑀 − 𝑅𝐶𝐼)
𝐴𝑀𝐼𝑀 = … … … … … … … … … … … … . . (3)
(1 − 𝑅𝐶𝐼)
Where RCI represents the range of the confidence

interval for the MIM under the null hypothesis of an efficient MIMt standard............................ (6)
market. This adjustment helps account for the potential
impact of estimation uncertainty. h,t
The AMIM is constrained between zero and one, with The MIMt (Market Inefficiency Magnitude at time t)
positive values (AMIM > 0) indicating an inefficient market
measures provide levels of inefficiency for different time
and non-positive values (AMIM ≤ 0) suggesting market periods t. The MIMt is constructed to smoothly vary between
efficiency. This measure allows for easy comparison of
0 and 1. A value of 0 represents a very efficient market, while
efficiency levels across different assets and periods. a value closer to 1 represents a more inefficient market.

The MIMt has some advantages. It does not depend on who said that cryptocurrency markets can switch between
the frequency of data in the sample. It also does not preset the efficiently and inefficiently trading. The positive skewness
number of autocorrelation lags, but considers them for Bitcoin, Ethereum, and Litecoin goes a long way toward
automatically. The MIMt measure uses standardized implying that these markets sometimes get episodically
coefficients and takes the absolute values in the equation. transitory in inefficiency and bring up the mean AMIM above
However, it has a drawback where some lags may be the median.
positively correlated with MIMt, inflating the measure.
B. Inefficiency Trends in Cryptocurrency Markets
To address this, Le Tran and Leirvik employed Monte The patterns of market inefficiency derived from the
Carlo simulations. This helped determine the 95th percentile application of the AMIM to bitcoins as well as Ethereum,
of MIMt assuming market efficiency. The difference between Ripple, Litecoin, and EOS are quite notable over time. The
this percentile and zero represents the threshold of trend for AMIM for these cryptocurrencies for the same plot
inefficiency. They then defined the Adjusted Market is given in Figure 3 which captures the 30-day moving
Inefficiency Magnitude (AMIMt) using this threshold as: average of the plots.
(𝑀𝐼𝑀 − 𝑅𝐶𝐼) Bitcoin (BTC), recognized as the first digital currency,

𝑀𝐼𝑀 = … … … … … … … … … … … . . (7) experiences rather a variability in efficiency within the period
(1 − 𝑅𝐶𝐼)
under consideration. Examination of the AMIM for Bitcoin
The AMIMt equation adjusts the MIMt by this illustrates that there are certain times of year during which the
threshold. The market is considered inefficient if AMIMt is price is more inefficient and other times when it is
greater than zero. If AMIMt is less than or equal to zero, the comparatively more efficient in its movement – 2014 and
market is efficient. Overlapping one-year windows are used 2016 are observable as the periods of higher inefficiency in
to calculate the AMIMt measures as recommended. the dataset. This pattern is in line with findings made by
Urquhart (2016) who has found that Bitcoin markets have
IV. RESULTS AND DISCUSSIONS symptoms of increasing efficiency over the period.
Topological analysis of the AMIM of Bitcoin shows that
A. Efficiency Analysis of Major Cryptocurrencies theirs is dynamic and can only change due to changes in other
The efficiency of major cryptocurrencies was analyzed market conditions and investors' behavior.
using the Adjusted Market Inefficiency Magnitude (AMIM)
measure over the period 2013-2019. Table 2 presents the Eth (ETH) has a somewhat different pattern where the
summary statistics of the AMIM values for Bitcoin (BTC), AMIM is more erratic in the first years of its existence but has
Ethereum (ETH), Ripple (XRP), Litecoin (LTC), and EOS. since become somewhat stable. This could have been due to
the fast-increasing and expanding Ethereum's blockchain
Looking at the mean AMIM values, all five technology that enabled smart contracts in the cryptocurrency
cryptocurrencies exhibit positive values ranging from 0.011 space. Following Nadarajah and Chu (2017), there have been
for Litecoin to 0.251 for Ripple. This indicates that on fluctuations in Ethereal market efficiency and they observed
average, these cryptocurrency markets showed signs of this could be due to the changing nature of its use and
inefficiency over the sample period, with Ripple displaying perception in the market.
the highest degree of inefficiency. The positive AMIM values
suggest that past price information could potentially be used Ripple (XRP) adheres to higher AMIM values than the
to predict future returns, violating the key tenet of the efficient other cryptocurrencies of the sample under consideration.
market hypothesis (Chowdhury, 2017). However, the Perhaps this continual sub-optimality has to do with Ripple's
magnitude of inefficiency varies considerably across the status of being a cryptocurrency with a close association with
different cryptocurrencies. the banking world. This observation is to the findings of
Brauneis and Mestel (2018) which indicate that the efficiency
Interestingly, while the mean AMIM values are positive, characteristics of cryptocurrencies may differ depending on
the median values for Bitcoin, Ethereum, and Litecoin are the type of the cryptocurrency which may have a specific use
zero. This means that these three cryptocurrencies had within a certain institutional environment or can be more or
lengthy durations of efficiency interrupted by inefficient less decentralized.
durations that place the common within the optimistic
territory. Wei (2018) thinks that cryptocurrency markets may C. Time-Varying Patterns in Cryptocurrency Market
be efficient at times while showing inefficiency at other times, Efficiency
as the market for cryptocurrencies evolves. That mean is The movement of these figures over time can be
higher than the median means indicating that the efficiency in observed in the 30-day moving average of AMIM for the five
these emerging digital asset markets is time-varying. major cryptocurrencies in Figure 3 above which gives a
perspective on the emerging and dynamic state of market
Powerful-point AMIM varies from 0 up to the standard efficiency. It is possible to note several intriguing trends
deviation The standard deviation of AMIM is from 0. 089 for tracing the development throughout the years watching this
EOS to 0. 151 for Ripple, which shows the great variation of time series.
the level of market efficiency for all cryptocurrencies over
time. This was supported by Vidal-Tomás and Ibañez (2018)

In the case of Bitcoin, it was established that AMIM than the other coins. The high AMIM for Ripple can be linked
values are not constant and tend to rise and fall with time, and to further characteristics and orientations of Ripple within the
they have characterized periods of relatively low efficiency crypto market and its cooperation with the banks
(AMIM close to 0), and episodes of higher levels of corresponding to the hypothesis of Brauneis and Mestel
inefficiency. What is more, inefficiency increases at the rates (2018).
in late 2013 and late 2017 which can be attributed to the
periods of high Bitcoin price volatility and speculative manias E. Sources of Variation in Cryptocurrency Market Efficiency
(Cheah & Fry, 2015). This implies that the level of efficiency Table 4 shows the AMIM of Bitcoin for the period 2013-
of a market gradually decreases in the prevailing conditions 2020 based on the quantile regression estimation: arrival
that are characterized by high fluctuations in the prices of time, 3. 89; unixtime, 3. 89; and log, 3. 90. With a mean of
securities. 083 and standard deviation of 0. 132. To the same effect, the
middle of the range for the AMIM was $ 0 for Bitcoin. 000 as
AMIMs of Ethereum have a rather dissimilar trend; they for the minimum value and a range of -0. A maximum of 0 is
stand high during the beginning phase of Ethereum, but on recorded for 349. 370. Said percentages of AMIM of other
average, they are a decreasing line. This could signal the popular cryptocurrencies of that period were significantly
enhanced efficiency of the markets as the Ethereum system lower than that of Bitcoin, while the distribution's skewness
and the market grew and more liquidity started to flow in the and kurtosis coefficients were the opposite. These results
markets. Nevertheless, there were flare-ups of inefficiency, suggest that, compared to its counterparts, Bitcoin markets
which was seen in early 2016 and mid-2017. As noted by were more frequently characterized by periods of inefficiency
Bariviera (2017), the efficiency of cryptocurrency markets within the considered sample period (Antonakakis et al.,
can evolve as trading activity and market structures develop. 2019).
Ripple (XRP) stands out as having consistently higher The findings that have been made from the regression
AMIM values compared to the other cryptocurrencies, model have several implications concerning the drivers of the
indicating persistent inefficiency throughout much of the efficiency market, in the context of the Bitcoin market. It was
sample period. This aligns with the summary statistics in noted earlier that evidence was obtained showing that
Table 2 showing Ripple with the highest mean AMIM. The changes in global FSI were statistically significantly related
sustained inefficiency could potentially be related to Ripple's to the Bitcoin AMIM at all quantiles. This means that
more centralized structure and close ties to the traditional increased stress and uncertainty in traditional financial
financial system, which may impact price discovery systems are negatively related to the efficiency of
mechanisms (Chowdhury, 2020). cryptocurrency markets perhaps due to increased speculation
and herding among the players (Almansour et al., 2020).
D. Statistical Analysis of Market Inefficiency However, greater performance in international equity
Table 2 provides a comprehensive statistical summary markets, as measured by the MSCI index, had the exact
of the AMIM for the five cryptocurrencies under study. The inverse relationship to Bitcoin's AMIM, particularly in the
results offer valuable insights into the nature and extent of more extreme percentiles. This is in line with the assumption
market inefficiency across these digital assets. that an increase in institutional investment and market depth
during periods of equity market appreciation enhances
Bitcoin (BTC) shows an average AMIM of 0.083, cryptocurrencies' market efficiency (Ghazani Jafari, 2021).
indicating a moderate level of inefficiency. However, its
median AMIM of 0.000 suggests that Bitcoin experiences As mentioned in the table above, we also get estimates
substantial periods of efficiency, which is consistent with the of a statistically positive correlation between Bitcoin's AMIM
notion of adaptive market efficiency proposed by Lo (2004). and both the EPU index for economic policy uncertainty as
The standard deviation of 0.132 points to considerable well as the VIX for implied volatility in the stock market.
variability in Bitcoin's efficiency over time, supporting the These findings corroborate related studies pointing to the
visual evidence from Figure 3. effect showing that elevated macroeconomic and geopolitical
risks generally erode effective price formation in the
Ethereum (ETH) exhibits a lower average AMIM of cryptocurrency marketplace (Chowdhury, 2020). Of all the
0.061, suggesting slightly better overall efficiency compared cryptocurrency-specific covariates analyzed, volatility was
to Bitcoin. Like Bitcoin, Ethereum's median AMIM of 0.000 statistically positively correlated with inefficiency at all the
indicates frequent periods of efficiency. The lower standard quantile levels, in support of the idea that a high level of
deviation was noticed with 0. Based on 095, Ethereum also volatility in market conditions leads to low efficiency. In
can be considered somewhat more consistent in its efficiency recent times, liquidity proved to have a statistically negative
as compared with Bitcoin, though the reason is most likely in influence with AMIM which is in line with the understanding
the broader use profiles. that activism and liquid assets lead to better operating
performance (Wei, 2018).
Ripple (XRP) can be identified as having the highest
average AMIM of 0. 251, and a median of 0. The median of
268 showed that it has endured and was significantly
inefficient. This is in line with the representation in the v BAR
in Figure 3, whereby XRP always records higher inefficiency

 The Results Reveal Several Key Factors Influencing and Yousaf et al. (2021) who enumerated uncertainty and
Cryptocurrency Market Efficiency: The Results Reveal investor sentiment as affecting the cryptocurrency market
Several Key Factors Influencing Cryptocurrency Market condition.
Efficiency:  Internal Cryptocurrency Factors: Consequently, VOL
which measures the level of volatility exhibits the highest
 Global Financial and Monetary Policy Factors: The FSI positive correlation with AMIM, this implies that a high
remains positive and statistically significant across the level of volatility indicates inefficiency in the market.
different quantiles for AMIM, meaning that higher levels This is in line with the assessments made by Antonakakis,
of financial stress raise the level of market inefficiency. et al (2019) about the role of volatility in cryptocurrencies
This accords with Ghazani and Jafari (2021) who market fluctuations. Therefore, there is a negative
discovered that the level of cryptocurrency fluctuation is relationship coefficient between LIQ with AMIM, it
positively associated with the Global Financial Stress. On agrees with Wei (2018) that more liquidity enhances
the other hand, the MSCI World Stock Market Index has market efficiency.
an inverse with AMIM indicating that a positive attitude
in the market has a positive association with the efficiency F. Implication of Theories/ Random Walk Hypothesis
of cryptocurrencies. This observation of patterns about AMIM coins across
 Investment Substitutes: Figure 3 presents the correlation various cryptocurrencies poses a question mark regarding the
between AMIM and the GSCI where the latter being a Extended Efficient Market Hypothesis and the Random Walk
proxy for a rise in commodity prices; this suggests that model. Consider the Random Walk process:
cryptocurrency markets are less efficient as prices
increase. This could perhaps attributed to the increase in 𝑦𝑡 + 1 = 𝑦𝑡 + 𝜀𝑡 + 1
speculative activity as investors look for another form of
investment. Surprisingly, it is found that gold has a Where εt+1 is an unpredictable shock at time 𝑡 +
negative correlation with AMIM especially in higher 1, 𝑤𝑖𝑡ℎ 𝐸[𝜀𝑡 + 1] = 𝐸𝑡[𝜀𝑡 + 1] = 0, 𝑎𝑛𝑑 𝜀𝑡 + 1 is
quantiles and therefore, perhaps could act as a hedge for independent of it. The simple return at time 𝑡 + 1 is:
cryptocurrencies during high levels of market 𝑟𝑡 + 1 = 𝜀𝑡 + 1 / 𝑦𝑡
inefficiency.
 Uncertainty Factors: The EPU index and the VIX index We can demonstrate that E[rt+1] = Et[rt+1] = 0,
show a marked positive correlation with AMIM in all implying that both conditional and unconditional
quantiles sending a clear signal that economic policy expectations of simple returns are unpredictable:
uncertainty does indeed raise the risk and volatility of
stock returns. This confirms the work of Yu et al. (2019)
𝐸𝑡[𝑟𝑡 + 1] = 𝐸𝑡[𝜀𝑡 + 1] / 𝑦𝑡 = 0
𝐸[𝑟𝑡 + 1] = 𝐸[𝐸𝑡(𝑟𝑡 + 1)] = 𝐸[𝐸𝑡(𝜀𝑡 + 1)] ∗ 𝐸[1/𝑦𝑡] + 𝑐𝑜𝑣(𝐸𝑡[𝜀𝑡 + 1], 1/𝑦𝑡)
Given that 𝐸[𝜀𝑡 + 1] = 𝐸𝑡[𝜀𝑡 + 1] = 0 and εt+1 is G. Cross-Cryptocurrency Comparisons and Market Maturity
independent of yt, we can assume cov(𝐸𝑡[𝜀𝑡 + 1], 1/𝑦𝑡) = The comparison of AMIM statistics for the different
0. 𝑇ℎ𝑒𝑟𝑒𝑓𝑜𝑟𝑒, 𝐸[𝑟𝑡 + 1] = 0. cryptocurrencies clearly shows certain patterns that might be
related to the maturity of the market and investors. In
However, the present analysis revealed a few non-zero addition, the general values of Bitcoin and Ethereum are
AMIMs which indicates that cryptocurrency returns do not lower than other markets, and more importantly, the median
follow this random walk model exclusively. Such a deviation value of each is zero, which implies that this may be a result
of actual returns from the random walk is a strong argument of these markets being more efficient than other markets in
for the adaptive market hypothesis, which states that the the sample.
process of efficient market adaptation depends on the market
circumstances, investors' behavior, and institutional factors Litecoin (LTC) has the minimum average AMIM of 0.
(Lo, 2004; Urquhart & McGroarty, 2016). 011 pointing to the more efficient overall of the compared
crypt currencies. This result is peculiarly intriguing given that
According to the analysis of the nature of changes in the Litecoin as one of the pioneers of the second-generation
dynamics of AMID, shown in Fig. 3, there is information Bitcoin copycats. This finding is similar to Jiang et al. (2018)
about the dynamics of cryptocurrency market efficiency. who established the efficiency of more established
Such evidence indicates that as much as cryptocurrency cryptocurrencies on the efficiency frontier over time.
remains efficient at some time in line with the random walk
hypothesis, it also experiences inefficiency periods that will Surprisingly, EOS being relatively young in the market
enable the players in the market to profit (Khuntia & of cryptocurrencies has an average AMIM of 0. 086 which is
Pattanayak, 2018; Sensoy 2019). almost at par with Bitcoin. Yet it has a higher median AMIM
of 0. 110, which implies more persistent inefficiency in its
market. This might be attributed to the fact that the market of
this crypto is relatively new in the market and the special

features of its blockchain platform which adds complexity to providers, monitoring transaction activities, and setting
the process of pricing. The efficiency level of these standards for consumer protection and disclosure.
cryptocurrencies differs as the adaptive market hypothesis of International coordination is crucial to mitigate regulatory
Lo (2004) suggests. The hypothesis states that there is no arbitrage and ensure financial stability.
universal efficiency in the various markets but these are  Investor Education: Given the speculative nature and
conditional markets that tend to gain efficiency with time as behavioral biases observed in cryptocurrency markets, it
various players respond to various changes in the market. is essential to enhance investor education and awareness.
Figure 3 pictures such phenomena of change for the AMIM Investors should be made cognizant of the risks associated
values and illustrates the overall steps of this adaptive process with high volatility, potential bubbles, and the limitations
in cryptocurrency markets. of using past price information for future return
predictions.
V. CONCLUSION, RECOMMENDATIONS, AND  Market Development: Efforts should be made to promote
FUTURE RESEARCH DIRECTIONS the maturity and efficiency of cryptocurrency markets
through measures that enhance liquidity, increase
A. Conclusion institutional participation, and foster the integration of
In conclusion, the emergence of cryptocurrencies has digital assets with traditional financial systems. This
had significant implications for traditional financial markets could involve the introduction of regulated investment
and their efficiency. This study's comprehensive empirical vehicles, such as cryptocurrency exchange-traded funds
investigation provides valuable insights into the dynamic (ETFs), to facilitate greater market depth and price
interactions between cryptocurrency and conventional asset discovery.
markets. The analysis of the Adjusted Market Inefficiency  Policy Considerations: Central banks and monetary
Magnitude (AMIM) reveals that major cryptocurrencies, such authorities should closely monitor the evolving role of
as Bitcoin, Ethereum, Ripple, Litecoin, and EOS, exhibit cryptocurrencies and their potential impact on monetary
varying degrees of market inefficiency over time. While policy transmission and financial stability. While the
Bitcoin and Ethereum tend to experience periods of both current scale of cryptocurrency usage may be limited,
efficiency and inefficiency, Ripple stands out as persistently proactive measures to address challenges to seigniorage,
inefficient compared to its peers. This suggests the presence money multipliers, and the effectiveness of rate
of irrational exuberance, speculative bubbles, and behavioral adjustments may be warranted as the digital asset
factors influencing cryptocurrency price formation, in ecosystem continues to grow.
contrast with the efficient market hypothesis.
C. Directions for Future Research
Furthermore, the study finds evidence of volatility This comprehensive study on the implications of
spillovers and return dynamics between cryptocurrencies and cryptocurrencies for traditional financial markets and their
traditional asset classes, including currencies, commodities, efficiency opens up several avenues for future research:
and stock market indices. This indicates that the emergence
of cryptocurrencies has increased cross-market linkages and  Comparative Analysis across Cryptocurrency Types:
information flow, challenging the notion of segmentation Further investigation into the efficiency characteristics
between digital and conventional finance. However, the net and dynamic linkages of different types of
impact on the informational efficiency of traditional markets cryptocurrencies, such as privacy coins, stablecoins, and
appears ambiguous, with potential benefits from improved utility tokens, could provide valuable insights into the role
arbitrage opportunities offset by increased volatility and of design features, use cases, and regulatory environments
liquidity-driven distortions. Factors such as global financial in shaping market behavior.
stress, macroeconomic uncertainty, equity market  Macroeconomic and Monetary Policy Impacts:
performance, and cryptocurrency-specific characteristics like Expanding the analysis of the interaction between
volatility and liquidity are found to significantly influence the cryptocurrencies and conventional monetary policy tools,
degree of market efficiency in the cryptocurrency space. as well as their broader macroeconomic consequences,
These findings underscore the complex and evolving nature could enhance the understanding of the evolving interplay
of the interaction between digital and traditional finance, with between digital and traditional finance.
important implications for regulators, investors, and  Behavioral Factors and Sentiment Analysis: Delving
policymakers. deeper into the role of behavioral biases, herd behavior,
and investor sentiment in driving cryptocurrency price
B. Recommendations dynamics can contribute to the development of more
Based on the insights gained from this comprehensive comprehensive models of digital asset valuation.
study, several recommendations can be made for stakeholders  Cryptocurrency Market Microstructure: Investigating the
in the evolving cryptocurrency and financial markets impact of factors like trading mechanisms, order flow
ecosystem: dynamics, and market maker activities on the efficiency
and price discovery processes in cryptocurrency
 Regulatory Approach: Policymakers and financial exchanges can shed light on the unique characteristics of
regulators should adopt a balanced and coordinated these emerging markets.
approach to cryptocurrency oversight. This should
involve establishing clear guidelines for service

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Cryptocurrencies and Market Efficiency: Investigate The Implications of Cryptocurrencies On Traditional Financial Markets and Their Efficiency

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Volume 9, Issue 8, August – 2024 International Journal of Innovative Science and Research Technology

ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24AUG810

Cryptocurrencies and Market Efficiency: Investigate

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Fig 2 (a): Trading Performance of Major Cryptocurrencies from 2017-2019

Fig 2(b): Trading Performance of Major Cryptocurrencies from 2017-2019

 Volume: This plots the daily trading volumes of Bitcoin

𝑅𝑡 = 𝛼 + 𝜑1𝑅𝑡 − 1 + 𝜑2𝑅𝑡 − 2 +. . . + 𝜑𝑝𝑅𝑡 − 𝑝 + 𝜀𝑡 … … … … … … … (1)

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The efficient market hypothesis (EMH) suggests that in Σ = LL'

Where RCI represents the range of the confidence

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(𝑀𝐼𝑀 − 𝑅𝐶𝐼) Bitcoin (BTC), recognized as the first digital currency,

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𝐸[𝑟𝑡 + 1] = 𝐸[𝐸𝑡(𝑟𝑡 + 1)] = 𝐸[𝐸𝑡(𝜀𝑡 + 1)] ∗ 𝐸[1/𝑦𝑡] + 𝑐𝑜𝑣(𝐸𝑡[𝜀𝑡 + 1], 1/𝑦𝑡)

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