The Cryptocurrency Market -An Investment Opportunity? About the Price Mechanisms of Cryptocurrencies

Onur Özek

Student thesis: Master thesis


Cryptocurrencies are fascinating phenomena that went through incomparable price developments in the past years. This thesis investigates the price mechanisms in the cryptocurrency market and seeks to evaluate their properties as investment vehicles. While most research in this field is focused on Bitcoin only, I deliver a comprehensive analysis of multiple cryptocurrencies and the underlying market between the 9 th of August 2015 and 31st of December 2017. I contribute to the existing research by adding new insights through tests on the weak form of the efficient market hypothesis (EMH) and the analysis of price formations for Bitcoin, Ether, Ripple, Litecoin, and Dash. For the analysis of the EMH, I apply five robust test and find that Bitcoin, Ether, and Dash are efficient, whereas other cryptocurrencies appear inefficient. In the most representative subsample, results suggest that only prices of Bitcoin and Dash are efficient while other cryptocurrencies show long-range dependencies of returns and do not follow a random walk. Nevertheless, results of the overall market indicate an efficient market and contradict with most previous research. Furthermore, empirical results suggest that prices of smaller cryptocurrencies are rather influenced by the public media attention and their liquidity, while Bitcoin is affected by the developments on financial markets and macroeconomic factors. Overall, I find that lower searching costs through an increased media attention as well as higher liquidities are significant drivers of prices and most likely, a reason for a higher market efficiency compared to previous research. Moreover, all results indicate a transition in this market towards efficiency and that prices are influenced by exogenous factors. Finally, the analysis demonstrates that cryptocurrencies are most likely used as a safe haven asset, speculation instrument and alternative investment vehicles by current investors. However, I find adequate investment opportunities only for the use as a diversification instrument and in some cases as a safe haven investment, due to a lack of fundamental value, high volatiles, and a low understanding of the price dynamics.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2018
Number of pages102
SupervisorsLinda Sandris Larsen