How is Bitcoin becoming more efficient every cycle?

Saif Naqvi
source: Pixabay

You may come across the term ‘fear, uncertainty and doubt’ or FUD. The logic behind the term is simple; unfavorable news triggers ‘fear’ or uncertainty, while favorable news creates demand or ‘greed’ amongst investors. Well, a few researchers applied this logic to argue that Bitcoin was maturing towards greater efficiency over time.

Recently, three researchers released a study of investor behavior in the Bitcoin market. Using abnormal trading volume methodologies, the paper discussed how investors tend to react to positive and negative news in the Bitcoin market.

The methodologies used showed that in the case of positive events, such as increased institutional adoption, investors seem to act more rationally. However, in the case of negative events, such as the onset of the COVID 19 pandemic, investors tend to behave a bit more irrationally. Simply put, the study indicated that the ‘fear’ factor is greater among investors when panic grips the market.

While the findings showed that Bitcoin was still inefficient, the paper did throw counter-arguments to show that the market was maturing into a more efficient one. This was explained by its interaction with various macroeconomic factors – such as monetary policies and the COVID 19 pandemic.

During the pandemic, initial fears subsided as institutional adoption grew from Wall Street firms. The development renewed confidence amongst investors who continued to place bullish bets on BTC. The report mentioned,

“Briefly, the results of the analysis of abnormal returns and trading volume suggest that, over time, the Bitcoin market has shown some signs of maturity and a tendency towards the onset of efficiency.”


So what does an efficient market mean? It means that Bitcoin’s market is aligning more and more with macro trends and the same is beginning to reflect the ‘true value’ of BTC. In another sense, Bitcoin heading towards greater efficiency is a positive development the asset’s price is becoming more consistent with its fundamentals, meaning that investors would not be able to exploit the market to earn abnormal gains.

Source: TradingView

Meanwhile, the paper’s theory is certainly put to test considering recent crashes in the Bitcoin market. BTC continues to trade between $29K-$30K as analysts argue the possibility of a bearish cycle. Furthermore, the fear and greed index notched up by 2 points and touched 12 on Tuesday, indicating that the ‘extreme fear’ amongst investors had eased slightly.