The Maturity of Cryptocurrency Markets: A Market Efficiency Test Based on Trading Strategies

• Activity Number: 389 - Novel Data Collection Strategies in Business and Economics
• Type: Contributed
• Date/Time: Wednesday, August 10, 2022 : 8:30 AM to 10:20 AM
• Sponsor: Business and Economic Statistics Section
• Author(s): Jeffrey Chu*
• Companies: Renmin University of China
• Keywords: bitcoin; ethereum; cryptocurrency; market efficiency; trading strategy

Abstract

This paper assesses the maturity of the cryptocurrency market from the perspective of market efficiency by testing trading strategies. A rigorous research design is proposed for testing whether trading strategies can successfully generate abnormal returns. Our research design relies on three pillars: 1) fundamental tests to gauge the information content in the trading strategies; 2) predictability tests of trading strategies adjusted with risk; and 3) profitability tests of trading strategies considering explicit and implicit transaction costs. Focusing on a common technical analysis based on price patterns, we apply our research design to the cryptocurrency market (Bitcoin, Ethereum and Litecoin) and find that such trading strategies do not convey significant information, do not provide economic performance and are not profitable after accounting for transaction costs. This result is surprising because the cryptocurrency market is in its infancy.