Informational Efficiency of Cryptocurrency Markets
Posted: 6 Apr 2021 Last revised: 7 Jun 2021
Date Written: February 11, 2021
We study the price discovery process of cryptocurrencies that trade in unregulated and fragmented markets and have a non-traditional business model. ICOs exhibit significant inefficiencies with VRs (Variance Ratios) less than 0.7 for up to 5-years from the issue date. IEOs with a similar business model as ICOs but underwritten by exchanges are consistently more efficient than ICOs over 200 days, while IPOs are efficient within 30 days of issue. The study suggests that due diligence by exchanges and regulators can lead to more efficient prices. In addition, several unique features of ICOs (platform, proof type, and algorithm type) influence their efficiency. Finally, we analyze the influence of social media on the efficiency of cryptocurrencies. Our results show that one standard deviation increase in public attention (Reddit points) will reduce the inefficiency measure by 5%.
Keywords: Cryptocurrency, ICO, IEO, IPO, Market Efficiency, Variance Ratios
JEL Classification: G14, C22, C23, C24
Suggested Citation: Suggested Citation