Efficiency of cryptocurrencies

: will arbitrage opportunities continue?

Abstract

Cryptocurrencies are increasingly popular among investors and consequently receive risingattention, not only from the public but also from researchers. However, there remain many unsettled questions like whether cryptocurrencies are weak-form efficient. If they were, this would mean that technical trading, the most widely used trading strategy by retail traders, does no longer yield abnormal returns. This paper adds to the current literature by analysing thedevelopment of efficiency in Bitcoin and Ether over a time horizon from 2010 to 2022. I takethese two cryptocurrencies as representatives of the overall cryptocurrency market sincetogether they have a market share of over 60%.Using multiple efficiency tests, I build an efficiency index to track the development ofefficiency of the analysed crypto currencies. Through a dynamic rolling window analysis andthe split among several representative subsamples, I conclude that Bitcoin and Ether become more efficient over time. For both cryptocurrencies, this increase in efficiency is positivelycorrelated with an increase in liquidity. Comparing these results to the exchange rate of the Euro to the US-Dollar, the crypto currenciesshow a higher level of efficiency. This is not surprising considering that there is no central authority intervening to regulate the market.

Date of Award	30 Jun 2022
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Eva Schliephake (Supervisor)