Bitcoin's Price Efficiency

Bitcoin's price is going up again lately and is nearing all time highs.

A question in academic finance is whether financial assets' prices efficiently reflect market participants's view on the future.

I personally disagree that financial prices can at all be efficient. It is simply impossible that the price of a stock or a bond or Bitcoin's price for that matter is able to reflect all available information.

That said, however, there are different degrees of efficiency. Large companies's stock prices are arguably much more efficient that small capitalisation stocks.

Bitcoin, in fact, as a fresh new financial asset class exhibits quite low levels of efficiency. Bitcoin's price fluctuates constantly and looks quite erratic. One of the reasons for the low price efficiency of Bitcoin is that the factors influencing Bitcoin's price are not yet fully known or studied. There are many economic, technological and psychological factors influencing Bitcoin and other cryptocurrencies's prices.

And hence the high volatility exhibited by Bitcoin's price. As with every new asset class or a new stock listed on an exchange, the people studying Bitcoin's price are not many or are not as sophisticated as for large capitalisation stocks like General Electric, for example. The same is true for the investors in Bitcoin which are predominantly technologists from information technology firms and employees of banks and brokerages. More sophisticated hedge fund managers and even asset managers' portfolio managers are also present in the Bitcoin market, but at a much lesser scale. The low relative liquidity of Bitcoin also contributes to its less efficient price character. What is more, there is still the danger of a Black Swan event of governments outlawing Bitcoin and other cryptocurrencies, which seems to be embedded deeply in Bitcoin's price and market participants' minds.

As far as I am concerned, Bitcoin is set to thrive in the future, barring a major unforeseen event, but Bitcoin's price will remain very inefficient regarding the contained therein information for the foreseeable future.