Nic Carter: Bitcoin halving and efficient market hypothesis

With the approach of Bitcoin halved in May 2020, the date of the transaction Bitcoin person on whether the market is expected to change Bitcoin issued a fierce debate.

Those who play down the issue of the impact of changes, often referred to market efficiency. Therefore, this concept has aroused great hatred and controversy. Differences are often difficult to solve, as the EMH (Efficient Market Hypothesis Efficient Market Hypothesis) scarecrow version has been made, the parties are unable to agree on a shared definition. The concept of mutual understanding is a prerequisite for a useful debate. Since this concept is widely misunderstood, I think I should explain from the beginning.

EMH origin

The efficient market hypothesis is considered by some thinkers, including Benoit Mandlebrot, Louis Bachelier, Friedrich Hayek and Paul Samuelson. "Application of knowledge in society," Hayek's useful background reading of the concept, although it has never specifically mentioned the efficient market hypothesis.

He argued in a seminal article, compared with a centrally planned economy to develop distributed, market-based economy. The key insight: the market is an information aggregation mechanism, any central planner, no matter how skilled or how adequate resources can not match it. Take a look at the following passage (emphasis my own point of view):

"There is no doubt that this is a very important but unorganized knowledge, in the sense of knowledge of general rules, it is unlikely to be called science: knowledge of the particular circumstances of time and place precisely at this point the fact that everyone has some advantages than other people, because he has unique information that can be useful to use, but only the decision to launch him or by his active cooperation when, in order to take advantage of this information.

…… and occasional trips to empty or half-full ship departures living shipper, broker or real estate, all his knowledge almost always temporary opportunities, or arbitrageurs to profit from price differences in the local commodities, both is a very useful function to perform based on special knowledge others do not know the fleeting situation. "

In the section marked, you can begin to see how Hayek's view of the market: the number of different views and expectations gathered into power prices. Hayek understood as market-derived price information – a particularly high information source. Hayek, the beauty of the market is that the individuals involved in economic activities only by acting according to their own selfish interests, gave the signal in the form of prices. The efficient market hypothesis is particularly concerned about financial assets that investors to provide relevant information, which incorporated into prices by trading mechanism.

Samuelson's 1965 study proved that stock prices that were reasonably expected to fluctuate randomly. After that, the legendary financial scholar Eugene Fama eventually codified the efficient market hypothesis into a code in 1970 (you may have heard of the Fama-French model). In a paper entitled "Effective Capital Markets: A Review of Theoretical and Empirical Studies," Fama defines efficient markets as markets where "prices always fully reflect" available information.

EMH is not a mysterious statement. It was simply that market prices reflect available information. That is why scholars often refer to them as "efficient market information." The efficiency refers to information diffusion.

What exactly does this mean? It just means that if there is new information related to the assets to be traded, the information tends to be rapidly incorporated into the price of the asset. If you can reasonably imagine future events will affect the price, they will be merged into a known price. The market will not wait (knowable) events – they predict these events. This means that if weather forecasts predict next week and will appear hurricane destroyed sugar plantations, speculators push up sugar prices today, forecasting a supply shock. Now, of course, when there are unpredictable external shocks (Imagine a hurricane without warning occurs), then the price can only react in real time, because the information is known. Speed information fusion is one of the inspection efficiency.

Despite the efficient market hypothesis it is very simple, but it can tell us a lot of information about the operation of the market. If the price quickly contain new information, the market is efficient. Predictable market movements future events tend to advance into the price. Importantly, one of the consequences of the efficient market hypothesis is that, once all relevant information is included in the price, leaving only random fluctuations, the so-called "noise." This means that, although in the absence of fresh fundamental information exists, the asset prices will continue to fluctuate, but these fluctuations itself does not contain any information.

Finally, according to the maturity and liquidity of the assets of market participants, new information presents a unique difficulty (not already included in the price) is often different. This explains why you might be able to find a modest advantage in the micro-cap stocks, but not in predicting Apple's stock price Shique not necessarily the case.

Since the Fama's paper was published, together with Burton • McGill (Burton Malkiel) of "Walk Down Wall Street" (A Random Walk Down Wall Street) and other best-selling book on the subject, whether it is worth around active management began a intense argument. In fact, due to the efficient market hypothesis is difficult to find a consistent advantage, many investors began to question the hedge funds and mutual funds and other actively traded investment vehicles whether it makes sense. In the past 10 years, trillions of dollars flow out of this "positive" stock-picking strategy, the inflow of passive investment vehicles, these investment vehicles just want to track the performance of the entire market or a particular area. This is one of the most critical debate in the financial sector at present, mainly because of growing awareness, the market in general is valid.


EMH description


I have little objection to the "if" part of the EMH. If you come up to me, I would call it efficient markets model, rather than assuming. This is because it does not contain a hypothesis. It did not make a specific testable assertion of this world. As mentioned earlier, the efficient market hypothesis assumed that market prices reflect the information available (we have already noted, this is the primary purpose of the market). Interestingly, Fama in his 1970 paper called the efficient market model, rather than assuming. He also seems to have the same intuition.

I also think EMH somewhat tautological. Review Hayek, we know that (free) market is a measure of net social status information for a variety of assets. Therefore, if the EMH structure with our bold in the above "centralized information output" instead of "market price", we get the following results:

Centralized information output reflects the available information.

It certainly sounds repetitive. But this did not reduce the usefulness of the model. Rather, it means that opposition to the efficient market hypothesis is questioning the nature of the market itself. In fact, (I'll cover later in this article few articles) for most of the criticism of the efficient market hypothesis, usually covers the market for some reason no liquidation. So, if you admit EMH is repeated, then the "efficient market" will sound redundant. In fact, the default state (free) market is efficient because that's why we have the market. The market will find information about the person to compensate. Conversely, if they are not the default valid, then we would not have to worry about them.

Use it as a model, it is just an abstract description of the world, is a description of the operation of the market (and in general) should be, but it is not an iron law. This is the thinking about the market a useful way.

Let me make it clear, I do not believe that "strong form" efficient market hypothesis. Financial professionals I know are not. Strong type theory that the market all the time reflects all information. If this is true, then there would be a hedge fund or a fund manager active. Nobody would bother to study Apple's quarterly report, no one will bother to assess the Permian Basin oil discovery prospects. Obviously, considering that we have a huge active asset management industry, many very smart individual constantly looking for new information on the various assets, such strong form is untenable.

To be honest, EMH not you "believe" or "do not believe" things. Option would be understood as a useful market information discovery mechanism, or completely reject the usefulness of the market.

Of course, there are conditions that lead to inefficiency of markets. Fama in his 1970 paper admits this, he will be transaction costs, access to relevant information about the differences between the costs and potential damage to investors called market efficiency. I will discuss two issues here: the cost of surface material information, as well as the practical expression of the friction inherent in the market point of view.

If the efficient market hypothesis true in general, how to find information on financial compensation?

So how to explain the fact that, despite the overall market effectiveness, there is still a large (although shrinking) industry involved in active investment? If the market-related information is often encoded in the price, then look for new information and trade accordingly there is no profit at all. But it is clear that many individuals and companies do provide new information actively trying. This is a bit contradictory.

This brings us to another of my favorite paper, without the possibility of efficient markets, the author Grossman (Grossman) and Stiglitz (Stiglitz). The author states that collecting information is expensive and not free. They went on to point out that because the efficient market hypothesis assumes that all information is immediately expressed in price, the cost of disclosing new information under the model will not be compensated.

Therefore, the market can not be fully effective: information asymmetry must exist, because there must be a way to compensate informed traders. Their model introduces useful information cost variables into a standard model of market efficiency. According to their model, if the information becomes more expensive, the market becomes less efficient and vice versa. Therefore, whether the market reflects their fundamentals depends at least to some extent on the ease of the relevant information.

Researchers have come to this conclusion:

" We believe that because information is expensive, the price does not perfectly reflect the existing information, because if it reflects, those who spend resources to obtain the information will not receive any compensation. The efficiency of the market's dissemination of information and the motivation to obtain it There is a fundamental conflict between them. "

A rather pleasant hint from Grossman and Stiglitz is that in order for the arbitrage price to return to the "should" profitability level, a group of traders must disrupt the price all year round. Fischer Black (of Black Scholes option pricing model) gives the answer, he published an article entitled "noise" (Noise) in the "Journal of Finance" (Journal of Finance). He pointed out the "noise" traders immature: noise rather than those who use the information to trade, the noise can be heard everywhere. Just hang around Tradingview and see a lot of indicators that people can trust. Black market participants will be divided into two categories:

1. People who trade based on noise are willing to trade, even from an objective point of view, they are better not to trade. Maybe they think they are dealing noise information. Maybe they just like to trade.

2, there are a lot of noise traders in the market, it is to pay for those who have information about the transaction. Most of the time, noise traders as a group due to trading losses, and the information traders as a group will make money.

Black believes that noise "financial markets possible." "The presence of noise traders gives liquidity to professional companies such as hedge funds, and also gives valuable counterparties."

As Grossman and Stiglitz point out, noise theory addresses the "obvious impossibility" of efficient markets. There is not introduced by experienced traders noise for experienced traders in the price introduction of information provided considerable economic incentive. So you can thank degens excessive trading in Bitmex – they are those who Bitcoin allocate resources and quickly provide information about the compensation fund.

If the efficient market hypothesis true in general, how to explain the uncertainty of the market situation?

This is another good question. There are plenty of examples show that arbitrage opportunities can easily be found, but for some reason, arbitrage can not be closed. The most famous of these examples, can be said to lead to LTCM (Long Term Capital Management) demise of the transaction.

This is a pair of bond trading, they are actually the same, but different prices (partly due to the 1998 Russian default). LTCM was betting bond prices will converge. However, many other hedge funds also use leverage the same bet, because the bond failed to converge, a limited partner of hedge fund redemptions faced margin calls and forced to open. This opens a feedback loop, causing further squeeze: cheaper bonds are sold, and more expensive instruments continue to rise during short covering. Long-term capital management companies are betting on market efficiency and the integration of these instruments; but as market pressure and suppressed leverage gradually decrease, they fail to complete the transaction and the fund collapses.

Shleifer and Vishny published a paper entitled "The Limits of Arbitrage" in 1997 to study this phenomenon. Shleifer and Vishny pointed out that in general, arbitrage is usually not performed by the market, but is a task entrusted to a specialized agency (usually a fund). Arbitrage is therefore expensive: it requires freely available capital. There is a paradox here : when the market is under pressure, there are huge opportunities for arbitrage (for example, many stocks have low P / B ratios). But in times of market tension, funding is the scarcest. Therefore, arbitrageurs who need capital to operate have the worst ability when they need to carry out the necessary arbitrage most. This is the limit of arbitrage. As stated in the paper:

"When arbitrage needs funds, when arbitrageurs have the best opportunity, that is, when their short-selling mispricing becomes worse. Fears about this situation will make them more cautious in their initial trading and therefore improve the market Efficiency is less efficient. "

As a simple example, a value-based hedge fund raised funds from outside. They will tell limited partners (investors in hedge funds) that they intend to make reverse bets-for example, buying value stocks at low valuations. Suppose the market goes down and they buy a basket of stocks whose valuations have shrunk and the price-earnings ratio is very low. However, imagine that the market subsequently fell another 40%. Their limited partners are now staring at losses and demanding redemption. This may be the worst moment: the fund has to sell these shares at a loss, even if they have high confidence in long-term profitability. They are more willing to buy (now heavily discounted) stocks whose valuations are even more attractive. To make matters worse, liquidating these positions will force them to fall further, penalizing other funds that do the same.

As a result, Shleifer and Vishny found:

Performance-based arbitrage is particularly ineffective in extreme cases, in which case prices significantly deviate from the normal range and arbitrageurs are fully invested. In this case, arbitrageurs may exit the market when their participation is most needed.

EMH's arbitrage limit warnings actually explain a lot of situations in which people describe market conditions and lament that the information was not included. This is often considered a contempt for the efficient market hypothesis. But of course, we cannot expect the malfunctioning market to function properly. So, therefore, when Dentacoin's multi-billion-dollar hypothetical market value is touted as an example of inefficient markets, given that it may have a very small float and ownership is very concentrated, obtaining short-term borrowing is impossible. This means that market participants cannot meaningfully express their views on assets.

A complete concept


Considering these constraints (market structure, expensive information, arbitrage restrictions, etc.), we can design a more complete EMH version that includes these considerations. So you can design a modified EMH that sounds a bit like this:

Free markets reflect to some extent the information available, and pricing entities are willing and able to act mechanically based on that information.

Free market: Because state-controlled markets may be unclear (for example, capital-controlled money markets do not give a reliable signal because sales are actually restricted).

Pricing entities: Because small companies ultimately don't matter in most cases. A small number of well-funded participants is enough to incorporate important information into the price.

To the extent they are willing to: This includes "expensive information" warnings. If the cost of access to information higher than the value of the tool (for example, in the case of micro-caps found accounting fraud), the information will not be included in the price.

Mechanical capabilities: This covers situations where arbitrage restrictions exist. If there is a liquidity crisis, or the market is not functioning properly for various reasons, and the fund is unable to operate its view of the market, there may be inefficiencies

Therefore, when most financial professionals talk about the efficient market hypothesis, they usually refer to a modified, slightly hollow hypothesis, as described above. They almost never refers to the "strong form" efficient market hypothesis.

Interestingly, by breaking down EMH, we stumbled across a completely different concept. The model I describe here is somewhat similar to Andrew Lo's adaptive market hypothesis. In fact, although I am happy to think that most (liquid) markets are effective most of the time, the adaptive market model reflects my view of the market better than any general EMH formula.

In short, Lo attempts to reconcile the results of behavioral economics research that find investors' apparently irrational behavior with the orthodox EMH school. He called it the adaptive market hypothesis because he relied on a gradual approach to market research. Based on Black's insights, Lo divided market participants into "species", which allowed us to see market efficiency different from the mainstream:

Prices reflect as much information as possible, which is determined by environmental conditions and the number and nature of "species" in the economy, or, in appropriate biological terms, ecology.

Lo describes the profit opportunities brought by the asymmetry of information as "resources", which leads to the following formula:

If multiple species (or members of a highly dense species) compete for fairly scarce resources in a single market, the market may be efficient, such as the 10-year U.S. Treasury market, which does reflect very quickly The most relevant information. On the other hand, if a few species compete for considerable resources in a particular market, the efficiency of this market will decrease, for example, the oil painting market in the Italian Renaissance.

The situationalism and pragmatism presented by Lo's model is consistent with the experience of most traders, who intuitively understand that market participants are quite diverse.

What this means for Bitcoin and halving


As we can see, most markets are effective most of the time. I have discussed some exceptions: restrictions on arbitrage, non-free market conditions, applicable behavioral deviations, and situations where market participants may not have sufficient motivation to provide relevant information. The question is, do these conditions apply to the Bitcoin market ?

This does not seem to be the case now. We are not in a crisis of liquidity. There are no obvious limits to arbitrage. In an era where Bitcoin is not yet financialized (I would say any time before 2015), you can convincingly prove it. It is indeed not easy for a well-capitalized entity to express a positive view of Bitcoin. But today it is.

As for the free market, Bitcoin is obviously a very free market and one of the most free markets in the world (because this asset itself is highly portable, easy to hide and can be traded globally). Unlike most currencies, it does not have the support or guarantees of a sovereign state, nor does it have capital controls that limit selling. Participants also have the ability to perform a large number of short positions on Bitcoin, so they can express different opinions.

Therefore, we can check the "working market". Now, is the scale of Bitcoin large enough to allow a large number of mature funds to invest in concerted efforts to reveal important information? With a market value of $ 150 billion, I think it is absolutely sufficient. The ultimate test of market efficiency is whether the market change information is immediately incorporated into the price or is lagging. An event study covering the impact of external shocks (such as exchange rate shocks or sudden regulatory changes) on prices will be welcome.

Bitcoin market efficiency essential problem is there are still differences between market participants (ie, the lack of a consistent pricing entities share valuation model), as well as to develop more financial pipeline. There are still several types of entities that have difficulty obtaining Bitcoin exposure. Of course, overcoming these challenges will make Bitcoin's future brighter.

So, halved the price "has been digested," or it will be a catalyst for appreciation? If you read this, you will understand, I think the issue will be pricing changes in the entity ignored. Bitcoin anyone interested, from the beginning that supply track Bitcoin. January 2009, Nakamoto coding supply to achieve the release of the first in the world. Issuance of long-term changes in the plan does not constitute new information. Any reaction to the expected demand of "halving the catalyst", can be predicted from those mature funds have a strong exciting force.

Can Bitcoin appreciate from now? I don't believe in appreciation because if the halving happens, Bitcoin will be issued at a completely predictable rate of change (from 3.6% to 1.8%). Of course, I think there are other positive factors that can affect the price, most of which are difficult to predict . Is this consistent with EMH? Very good. The efficient market hypothesis allows information to be shocked (for example, imagine if we suddenly had hyperinflation of real-world currencies). It is also possible that pricing entities have overly conservative views on the future of Bitcoin, or that they are acting on a weak base model. These are consistent with weak forms of EMH.

There are structural efficiency barriers to regulated securities markets, such as a ban on insider trading. As Matt Levine likes to say, insider trading is a form of theft and someone uses information that is not their own to trade. Instead of finding information from public sources, they participated in and discussed similar mergers. Since insider trading is banned, share prices generally do not reflect upcoming catalysts such as acquisitions until they are publicly announced. However, inside virtual commodity markets like Bitcoin, insider standards often don't apply. If a catastrophic error is found, you can expect that this information may be integrated into the price immediately. Therefore, in this sense, the information efficiency of the Bitcoin market is likely to be higher than that of the US stock market.

Common objections

I will consider some objections. Most likely, your answer was covered.

I found an inefficient example. This is evidence that the market generally inefficient

This is a bit like the baseball into the air, claiming it proved temporary departure from the Earth's gravity is wrong. Almost no financial practitioners believe that all markets are always valid. If the uneven distribution of information, or the lack of information about the owner of the means of their views of the tool, then the price does not reflect the information. The market does not reflect the significant short-term case information, but begs the question of why market participants can not be pricing-related information. These failures are not weak evidence of the efficient market hypothesis, but to strengthen its effectiveness as a tool of interpretation.

Behavioral biases exist, so the market efficiency is not established

The researchers did find some behavioral biases persist, I think they systematically influence asset prices are reasonable in the medium term to a certain extent. However, the question here is whether they are relevant to the current issue – assuming that the supply rate change on asset prices – and whether these so-called bias really affect a high degree of liquidity of $ 150 billion in assets price formation.

You might replied: "Well, Bitcoin traders have a bias, this bias leads them to bid up asset prices in the case of asset issuance rate dropped significantly, even if the information has been well known." If you can be like Kahneman Tversky and as proof, which is a common human bias will affect asset pricing, and contrary to the mainstream market models, then you can not only win this debate, may also win a Nobel Prize. In this case, I should also mention Adaptive Markets Lo again.

Efficiency in Bitcoin is not possible, because it does not have the basic principles

Some people believe that everything in the crypto market is driven by market sentiment, and there are no fundamental factors at all. This is a fallacy. There are some obvious basic principles that everyone agrees with. Here is a short, non-exhaustive list:

1. The quality of financial infrastructure enables individuals to access and hold bitcoin. In 2010, buying bitcoin was almost impossible, and your only safekeeping option is the Bitcoin QT "Satoshi Client" or a homemade paper wallet. Today, you have access to a $ 1 billion bitcoin exposure that you can take care of yourself or rely on some of the world's largest asset management companies and custodians. This is a fundamental change

2. The quality of the Bitcoin software (compare the current version with Satoshi's first client). The protocol itself and the tools surrounding it have been improved, refined, and made more useful

3. The actual stability and function of the system-imagine the situation where a bitcoin cannot generate blocks for a month. This will definitely affect prices. If you admit it, you admit that there are "fundamental factors" in addition to pure emotions

4. The number of individuals worldwide who know and need Bitcoin. This is "adopted". It's not just emotions, it's an indicator of which funding sources around the world are actively seeking bitcoin exposure

There are many other basic principles I have not talked about here. Bitcoin Trading Fund attempts to track the trajectory of these variables and determine pricing Bitcoin relative to their growth are too high or moderate. This is the "basis of the analysis."

Similarly, if you do not believe, think about the contrast between the Bitcoin state in 2010 and 2020. Use, acquire, purchase, sale and storage to be easily many orders of magnitude. This is a fundamental change. Of course, these are not applicable to the stock of cash flow "fundamentals", but Bitcoin is not a stock. Bitcoin is a unit of ownership of books space, which allows you to access a particular transaction utility of the network. I admit that, unlike the current fundamentals of the stock as obvious. However, the concept of "fundamentals" is not limited to stocks or to cash flow. Global macro investors based on macro variables or political risk assessment to consider currency. Commodity traders concerned about the ups and downs of production and supply. There are similarities.

All of this suggests that market-related funds have meaningful information can be traded, not just emotional or speculation. Just hard to get an accurate assessment of the basic Bitcoin.

Efficiency in Bitcoin is not possible, because it is unstable

It is entirely possible that we have a volatile and efficient market. Recall that all the efficiency requirements that are available are included in the price. Consider the value of a call option close to expiration, whose base price fluctuates around the exercise price. The previous minute option was still in the money, and the next minute was worthless. This will be a situation that is both unstable and effective.

Or, consider the value of Argentine government bonds in dealing with political unrest. What is fundamental here is the willingness of the Argentine government to repay debt. An effectively functioning market will continually reassess the prospects for creditors to be repaid. During turbulent times, the fundamentals are unstable, so the value of bonds is also unstable.

Bitcoin's volatility is partly due to market participants' rapid reassessment of their growth prospects, both speed and trajectory. Even small changes in future growth rates can have a significant impact on implied present values. (In fact, in the DCF model of stock valuation, output is very sensitive to long-term growth rates.) Market participants often revise their growth expectations, which are different (since there is no single dominant model for the price of Bitcoin) , Leading to increased volatility (especially in the case of inelastic supply). If future growth expectations are the root cause, these expected rapid appreciation will lead to price fluctuations. Therefore, volatility does not affect efficiency.

If the efficient market hypothesis is correct, then in accordance with the current valuation, Bitcoin should just started

This world is not running. As I explained above, in the beginning of the birth Bitcoin is not like this has a mature, solid foundation. It must grow into their valuations. In the early days, there was considerable uncertainty as to whether it could succeed. It must go through all these trials and tribulations to go to today's position. Therefore, if a large fund on the first day will be the allocation of funds to Bitcoin, it does not make sense (though, in hindsight, which is obviously justified) because they do not know Bitcoin will grow, and in many Case, because they are structurally unable to invest in Bitcoin. Think in 2012, that is two years after the birth of Bitcoin, how you get it. You may have to use something like Charlie Shrem's BitInstant, or (bankrupt) Mt Gox, and we now know its operations are a mess. You could have mined Bitcoin, but this is a difficult and technical task.

This brings us back to the "limit of arbitrage" point. From 2009 to the present, many investors want to buy bitcoin, but due to regulations, operational risks and lack of effective market infrastructure, they simply cannot buy it. Even if they believe that Bitcoin will be worth more than $ 100 billion at some point, they are not able to take advantage of this view. In addition, investors did not have a firm conviction in the beginning. They need to see Bitcoin operate successfully in the "wildfield" rather than be shut down before choosing to store wealth in it. If you believe that Bitcoin's continued success represents new information being brought to the market, then you will understand that the efficient market hypothesis does not require that it be fully formed from the womb when initially valued at $ 100 billion.

Things like Plustoken affected by Ponzi scheme related purchases are not valid

I agree that investors aggressively buying (and then selling) about 200,000 bitcoins are the main driver of price movements in 2019. However, this does not affect efficiency. If it is known in the West that Plustoken owns all of these Bitcoins and is preparing to sell them, and the price of Bitcoin has not changed, then I agree-there will be questions about efficiency.

However, it wasn't until a long time later, after a large number of coins were sold, that information about Plustoken BTC spread in the West. Remember that efficiency does not require that prices remain the same forever. Instead, it indicates that prices change based on new information.

Affected by suspicious news, the prices of small-cap assets have risen by hundreds of percentage points. This is evidence of market inefficiency, which proves that the efficient market hypothesis is wrong

Similarly, local or temporary evidence does not invalidate the efficient market hypothesis. You either believe the market is a good information clearing mechanism or you don't believe it. It is true that from a structural perspective, many small cap altcoin markets are very bad. These assets may be traded on unregulated or illiquid exchanges. This means that the prices you see do not necessarily reflect reality. Therefore, aside from the poor market environment in which they are trading, the temporary injection and sale of illiquid assets does not prove to be a two-way effect.

In general, most advocates of the efficient market hypothesis will acknowledge that efficiency changes positively with the size of the assets and the complexity of the participants, and it is difficult for large listed stocks to find an advantage. Chances are, if you find some market-related information about Apple or Microsoft, others will find it too. However, in smaller and less liquid asset classes, the return on disclosure of relevant information is much lower, so fewer analysts are actively injecting information into assets, which means opportunities are likely to exist. This is because multi-billion dollar large funds simply cannot implement micro-market capitalization asset trading strategies.

Simply put, efficiency has scale effects. Bitcoin is not a miniature capital, which is a value of more than $ 100 billion global trading assets. This ensures that by providing relevant information and express it possible to obtain high returns in the form of the transaction. Therefore, inefficient micro obvious difference between the market value and the advantages of a large number of analysts looking for mature assets "cottage money" (looking for a low rate of return information, the market is very weak).

When small crypto assets are under 51% attack or bad news, they don't fall. This indicates that the market is not efficient encryption

Here I will follow Lo's explanation of adaptive markets. Small-cap assets are usually held by hardcore believers, or better explained, are closely held by allies of the founding team. In this case, you may have seen such a conversation on Reddit and Telegram: the owners of the coins urged each other not to sell, especially in the case of bad news, because the crypto community will temporarily pay attention to this project. Faced with bad news, bond issuers are trying to mitigate the effects of negative catalysts by repurchasing. However, this applies only to small markets, as ownership is not widely distributed.

In addition, it is worth considering that no one actually holds these assets because they like the underlying technology or find it interesting to steal specific code from Bitcoin Core or Ethereum. The holding of small-cap crypto assets is an expectation of a possible "pump" in the future. Therefore, the damage associated with the actual agreement itself is not fundamental. The bottom line is that the distribution team wants to "adopt," or at least by getting a favorable press release and partners pretending to adopt. As long as the underlying protocol is not completely broken down, the "foundation"-the hype power of the release team-can remain the same.

As some bitcoin buyers will regularly buy bitcoin mechanically, and new supply will decrease, this will cause the currency to appreciate in value.

This is an example of first-order thinking. The efficient market hypothesis exists in the secondary market. For me, the key insight of the efficient market hypothesis is that any information you have is also a seasoned market participant. As experienced market participants have a strong incentive to find relevant information and conduct reverse transactions, you can bet that they already expressed this information the moment they obtained it. If this is indeed a reasonable assumption (that is, with a circulation of half, the static pressure will have a positive impact on the purchase price), then these funds have expressed a positive view of this form of trading. This is called "pricing". "If there is a major discovery tomorrow, it will be included in today's price. This is one of the most tricky features of EMH and you really need to work hard to understand it.

So the question becomes not "information vacuum will affect the price of it?" But "Do I have the most intelligent, the most abundant information resources hedge fund analyst does not have?" If the answer is "no", then you can expect that information is now included in the price (in a way, it is actually important information).

Why focus on fund? The reason is that they are professional company, they actively seek information and trade in the form of expression. They are the price and the "fundamentals" consistent entity. "You need to remember, you do not act in isolation. You're like a jungle in the digital world, predators lurking everywhere. These predators skilled, quick action, rich in resources.

In the stock market, we are talking about and have a personal relationship with the CEO and CFO of funds, with their dinner, and interpret whether they are optimistic about the next quarter. There are dozens of analyst fund you do not even know the existence of the data set. They will track the movements of private aircraft company, to determine whether it is possible to make acquisitions. They will run a machine learning model to assess his emotional state through the shaking of his eyebrows when Jerome Powell announces the Fed's action. They Parking acquire images from the satellite data to predict whether Wal-Mart's quarterly earnings will exceed the guidelines. Open Market competition is fierce. They are some of the most talented people, and there is no real limit (except for insider trading) to act on the information. Anyone who thinks they have the advantage of people are free to express their views in the transaction.

So, if you think you grasp the market-related information (such as supply contraction think this will push up the expected high price), then the most experienced players will master the information. They have evaluated it and taken action.

Also, you need to keep in mind that markets are not democratic. They are weighted by capital. Whales more than the fish can express strong opinions. Hedge funds simply have more capital (and they often get cheaper leverage!) Then, when they form a view on a stock, they have a way to express that view. This is how "pricing" happens. Therefore, in practice only the pricing is the most important entity.

Plustoken accumulates 200,000 BTC (approximately 1% of supply) and sells it, which is the main driver of price trends in 2019. Why does halving (affecting 1.8% of circulation) not produce the same effect?

First, the rise and fall of Plustoken was unexpected. This is really new information-so much so that most investors don't know its size until after the Ponzi scheme is basically over. In addition, as far as we know, the trapped BTC wallet is liquidated in a relatively short period of time, about 1-2 months. For any market, this is a large amount of BTC that needs to be absorbed. Changes in the circulation amount combined reduced the annual rate by 1.8%, but this is the figure after the annual rate. Mechanically, this means that there will be a reduction of approximately 24,800 BTC mined each month. This is a large number, but it does not mean that 200,000 bitcoins have been liquidated in a short time. Moreover, unlike Plustoken, this reduction is known.

The halving will affect bitcoin from the demand side, arousing investor excitement and getting media coverage. Therefore, halving will remain a positive catalyst for Bitcoin

The same logic as the response above applies here. If you look at the Litecoin case study, you will see that the price rises significantly with the expected halving, and then falls again after halving. This is most likely an example of how investors hope that halving will be a positive catalyst. You can see how investors position themselves (betting on how they think other investors might react) that affects prices. You enter a recursive game where everyone is watching other people and they are trying to predict what others are doing. Therefore, even if there is a highly anticipated demand shock on the day of the price reduction (whether through media reports or just investor enthusiasm), a price-setting entity will expect it, and may Included in the price.

If the market is efficient, there is no point in investing in Bitcoin

But in fact, it's not. There are certain information aspects of Bitcoin that are completely known and transparent, such as the supply schedule. However, as I mentioned above, many basic drivers of Bitcoin price are difficult to quantify or even know. For example, no one knows exactly how many Bitcoin owners are in the world. If you can predict these factors better than others, you will be able to find the edge. In addition, there are many unpredictable shocks that may have a positive impact on Bitcoin in the future, such as a currency crisis. EMH critics do not see, it only specifies the express market information available. Clearly, the future is unknown catalyst unavailable. They also did not happen.

Ultimately, if you are predicting growth of Bitcoin better pricing than other entities, you may want to use their knowledge to trade advantage. I think this is a perfectly reasonable prospect. Therefore, even if the efficient market hypothesis, I would never underestimate the potential attractiveness of Bitcoin active distributor. In fact, I personally optimistic about Bitcoin. So it's clear that I think it's good to have specific expertise in the Bitcoin space. If I am a firm believer EMH, I would not be actively managed. In fact, active managers have a very strong incentive to find ways to deny the efficient market hypothesis. So I am here to defend it.

In the presence of weak-form efficient market hypothesis, fundamental analysis is possible, and indeed necessary. After all, someone must be analyzed to reveal information about the final price of representation. This work left to do active managers. So in the final analysis, those pesky hedge fund investors still useful for certain things.

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Author: Nic Carter co-founder and partner at Castle Island Ventures

Compilation: Share Finance Neo