The Efficient Market Hypothesis (EMH) proposes that asset prices fully reflect all relevant information, making it impossible for investors to consistently outperform the market through active trading. This theory suggests that price movements are random and unpredictable, as new information is immediately incorporated into current prices. The EMH serves as a foundational concept in modern financial theory, though its applicability to crypto markets is debated.
Information
The EMH differentiates between types of information: past prices (weak form), public information (semi-strong form), and private information (strong form). The degree to which a market incorporates these information sets determines its level of efficiency. In crypto markets, the transparency of on-chain data challenges traditional definitions of public information.
Arbitrage
Arbitrage activity acts as the primary force driving markets toward efficiency by exploiting temporary price discrepancies. When prices deviate from their fundamental value, arbitrageurs quickly execute trades to restore equilibrium, eliminating potential profits for other traders. The speed and prevalence of arbitrage in crypto markets are key factors in assessing their efficiency.
