Informational Efficiency of Cryptocurrency Markets

48 Pages Posted: 6 Apr 2021 Last revised: 25 Jan 2024

See all articles by Mahendrarajah Nimalendran

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate

Praveen Pathak

University of Florida

Mariia Petryk

George Mason University - Department of Information Systems and Operations Management

Liangfei Qiu

University of Florida - Warrington College of Business Administration

Date Written: February 11, 2021

Abstract

Our study sheds light on price discovery in cryptocurrency markets by analyzing the evolution and determinants of market efficiency. We compare various asset groups to determine market efficiency factors, including regulation, technology, and community activity. First, we identify persistent inefficiencies in the cryptocurrency market compared to the regulated stock market and attribute the existing gap to “hard” regulation. In addition, we compare unregulated to “mildly regulated” cryptocurrencies called initial exchange offerings (IEOs). We identify these “soft” regulatory practices administered by private third-party platforms and show their effect on reducing the efficiency gap for supervised digital assets. This result is confirmed by our extended analysis of the impact of the blockchain platform that voluntarily follows the regulatory guidelines. Our findings suggest that due diligence by platforms can lead to more efficient prices and therefore reduce investment risks. We further show how technology choices and online communities affect cryptocurrency efficiency. Our findings will be of interest to policymakers and cryptocurrency trading platforms for designing policies that control investment risks.

Keywords: Cryptocurrency, ICO, IEO, IPO, Market Efficiency, Variance Ratios

JEL Classification: G14, C22, C23, C24

Suggested Citation

Nimalendran, Mahendrarajah and Pathak, Praveen and Petryk, Mariia and Qiu, Liangfei, Informational Efficiency of Cryptocurrency Markets (February 11, 2021). Donald G. Costello College of Business at George Mason University Research Paper No. Forthcoming, Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3818818

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Praveen Pathak

University of Florida ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

Mariia Petryk (Contact Author)

George Mason University - Department of Information Systems and Operations Management ( email )

4400 University Drive
Fairfax, VA 22030
United States

Liangfei Qiu

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

HOME PAGE: http://sites.google.com/site/qiuliangfei/

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