Regulated cryptocurrencies create most efficient markets, new study shows

Voluntary regulation by exchanges helps investors


New research has shown that the most regulated cryptocurrencies create the most efficient markets. The study, conducted by a group of University of Florida professors, analyzed various cryptocurrency offerings, from unregulated ICOs to exchanges enforcing their own rules, and compared them to traditional stock exchanges, which are highly regulated by the government.

The researchers found that unregulated ICOs were the least efficient, while initial exchange offerings (IEOs) were nearly as efficient as traditional stock initial public offerings (IPOs). In IEOs, exchanges set minimum standards and rules and commit to providing investors with trustworthy information about the value of the cryptocurrency.

The study is the first of its kind to examine how regulation affects cryptocurrency markets’ efficiency. The exchange-based regulation is entirely voluntary but could provide guidance to lawmakers who are increasingly interested in providing some crypto regulation to the still-emerging markets.

“Both small and institutional investors should know, if they invest in coins without any regulation, they may suffer from price manipulation or a severe lack of insider information,” said Liangfei Qiu, a University of Florida professor of business and one of the authors of the new study. “Instead, they may want to invest in coins listed with platforms that provide some vetted information, which serves as a kind of minimal regulation that protects investors and makes markets more efficient,” he said.

The researchers analyzed the variance ratios of the stocks and cryptocurrencies, which is a measure of how predictable the future price of an asset is. They found that market inefficiencies, such as insider knowledge, can start to distort the prices, usually at the expense of investors who are out of the loop.

The study could provide guidance for policymakers who want to make sure that the cryptocurrency market runs well. “If policymakers want to make sure that the market runs well, they need to provide some structure to promote regulation,” Qiu said.

The study, which was conducted by Qiu along with fellow UF Warrington College of Business professors Mahendrarajah Nimalendran and Praveen Pathak and former doctoral student Mariia Petryk, now a professor of business at George Mason University, is forthcoming in the Journal of Financial and Quantitative Analysis.

Journal Reference

  1. Nimalendran, Mahendrarajah and Pathak, Praveen and Petryk, Mariia and Qiu, Liangfei, Informational Efficiency of Cryptocurrency Markets (February 11, 2021). Donald G. Costello College of Business at George Mason University Research Paper No. Forthcoming, Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN:


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