Regulation
Regulation Makes Cryptocurrency Markets More Efficient – News
First-of-its-kind cryptocurrency research finds that the most regulated coins create the most efficient markets.
Cryptocurrency regulation, often provided by cryptocurrency exchanges like Binance, can also help protect investors by providing reliable public information.
“Both small and institutional investors should know that if they invest in coins without any regulation, they may suffer from price manipulation or a serious lack of inside information,” he said Liangfei Qiueconomics professor at the University of Florida and one of the authors of the new study.
“Instead, they may want to invest in coins listed on platforms that provide some controlled information, which serves as a kind of minimum regulation that protects investors and makes markets more efficient,” he said.
The study is the first to examine how regulation affects the efficiency of cryptocurrency markets. The researchers analyzed a range of cryptocurrency offerings – from essentially unregulated ICOs, or initial coin offerings, to exchanges that set and enforce their own rules – and compared digital currencies to traditional stock exchanges, which are highly regulated by the government.
Unregulated ICOs were the least efficient. But initial exchange offerings, another cryptocurrency offering known as IEOs, were almost as efficient as traditional initial public stock offerings, or IPOs. In IEOs, exchanges set minimum standards and rules and are committed to providing investors with reliable information about the value of the cryptocurrency.
Exchange-based regulation is entirely voluntary, but could provide guidance to lawmakers who are increasingly interested in providing crypto regulation to still-emerging markets.
“If policymakers want to make sure the market works well, they need to provide a structure to promote regulation,” Qiu said.
To evaluate the efficiency of stocks and cryptocurrencies, Qiu’s team analyzed their variance ratios, a measure of how predictable the future price of an asset is. Economists have long argued that future asset prices are essentially unpredictable, as long as everyone has the same information about the underlying value of those assets. Market inefficiencies, such as insider knowledge, can begin to distort prices, usually to the detriment of investors who are out of the loop.
Qiu collaborated with fellow UF Warrington College of Business professors Mahendrarajah Nimalendran and Praveen Pathak and his former doctoral student Mariia Petryk, now a professor of economics at George Mason University. Their study is forthcoming in the Journal of Financial and Quantitative Analysis.
Eric Hamilton February 1, 2024