Factors Responsible For the Efficiency of Bitcoin Markets

Bitcoin continues to be the leading player in the cryptocurrency market. Constant growth and increasing attention from investors have boosted growth prospects in the Bitcoin market. However, efficiency is a problem in many cryptocurrency markets but Bitcoin can become a notable exception in this regard. Market efficiencies play a pivotal role in determining the attitude of investors. However, it is also true that many crypto users are unaware of the factors that determine the efficiency of crypto markets. Therefore, it is vital to briefly explain some of those factors and understand their influence.

Factors That Determine Efficiency in Cryptocurrency Markets

There are major factors that determine the efficiency of cryptocurrency markets around the year. Some of these factors play a positive role in enhancing efficiency while some reduce efficiencies.

Uncertain Regulations

Bitcoin markets can improve efficiency only if the number of uncertain regulations comes down. Therefore, regulatory clarity is necessary and once it becomes universal, investor behavior can change for the better. It is important to reduce ambiguities about different jurisdictions and standardize regulations. 

Speculations

Speculations up to a moderate limit are beneficial for the Bitcoin market. It helps in better investments. However, an excessive degree of speculation results in volatility and market inefficiency. 

Liquidity

Crypto markets usually have low levels of liquidity, despite the involvement of exchange platforms which guarantee better liquidity. Manipulation and price swings can be large if liquidity is lower and vice-versa.

Common Biases in Bitcoin Investing

Bitcoin markets are susceptible to common biases that have a large impact on its valuation and profitability. 

Herding Behavior

Crypto investors including most Bitcoin investors usually have a “herd mentality” and therefore follow the crowd. They purchase when prices are high and sell when prices decline. Sometimes, this behavior leads to market crashes and bubbles.

Aversion Towards Losses

The fear of losses is naturally up to a limit. However, excessive aversion can have a negative impact and lead to losses. It can also lead to wrong decisions and analysis.

Anchoring

Crypto investors may often resort to anchoring when prices are extraordinarily high and not bother about the broader market conditions. In the context of cryptocurrencies, anchoring can be beneficial only when the overall market conditions are bullish. 

Overconfidence

Sometimes, markets lose their efficiency if investors become overconfident and automatically assume usual certainties as a norm. This assumption can be erroneous and it may lead to inefficiencies of the crypto market. 

Systematic Momentum Index Can Improve Efficiency

Bitcoin markets can become more efficient by applying the Systematic Momentum Index (SMI). This index helps in identifying sources of market inefficiencies and helps in better performance in the short term.

Risk Management and Consistency

SMI improves risk management and reduces the impact of human error. This is because it leads to a better rules-based approach. Risk management improves considerably because of predefined entry and exit points. It also improves portfolio stability. 

Improves Returns

SMI helps in addressing sources of market inefficiencies and leads to avoidance of common biases. Therefore, it invariably improves returns compared to other investment strategies.

Also Read- Comparison Between Precious Metals and Cryptocurrencies

In Conclusion

The efficiency of Bitcoin markets is dependent upon several factors. However, these factors are not permanent and can be altered considerably. The alteration of these factors can yield better returns and make markets more efficient. The Systematic Momentum Index (SMI) can resolve efficiency problems and make Bitcoin markets more efficient. In the coming years, as the cryptocurrency sector continues to grow and evolve, it is expected that most factors responsible for inefficiencies will become irrelevant.