Testing of Random Walk Hypothesis in the Cryptocurrency Market

Abstract

Cryptocurrency as a financial asset has emerged as a fad among investors, academicians and policymakers alike. In a financial purview, this study intends to empirically test the behaviour of the cryptocurrency return, inferring its market efficiency. For this purpose, daily data of five cryptocurrencies (Bitcoin, Ethereum, Litecoin, Tether and Ripple) have been collected from 1 January 2016 to 31 March 2021 to investigate the well-known financial theory of random walk hypothesis for this young market. To provide statistical evidence and ensure the robustness of results, analysis is performed using the variance ratio test, augmented Dickey–Fuller test, Philip–Perron test, Breusch–Godfrey serial correlation LM test and ARIMA model. The statistical results illustrated strong evidence refuting the presence of the random walk hypothesis in this emerging market, thus implying inefficiency in the cryptocurrency market. Furthermore, the absence of random walk in the cryptocurrency makes this financial asset predictable, giving investors an arbitrage edge to earn abnormal gains using trading strategies, which is euphoria.

Inspecting the efficiency of cryptocurrency markets: New evidence

“…This implies that the price movements of these cryptocurrencies may not follow a random or independent pattern, as indicated by the lack of efficiency. This result is in line with those reported by Kurihara and Fukushima (2017); Caporale et al (2018); Bouoiyour et al (2019); Kristoufek and Vosvrda (2019); Caporale and Plastun (2019) and Verma et al (2022).…”

Do cryptocurrency investors in the UK need more protection?

“…In exploring cryptocurrencies as high-risk investments, a nuanced view of market efficiency emerges. Initial studies by Aggarwal (2019), Palamalai et al (2021) and Verma et al (2022) suggest that Bitcoin prices diverge from a random walk, attributing this to the high volatility of returns. This finding, however, is contested by Alexiadou et al (2023), who maintain that the efficient market hypothesis applies to most cryptocurrencies exhibiting random walk behaviour.…”