Random Walk Theory

Random walk theory suggests that asset price changes are independent and follow a random path, making it impossible to predict future prices based on past ones. In this view, price movements are the result of random arrivals of new information, which is by definition unpredictable.

While this theory is a cornerstone of traditional finance, its application to crypto is controversial due to the prevalence of trends, bubbles, and cyclical patterns. Many technical analysts argue that the market exhibits predictable behaviors that contradict the random walk.

However, the theory remains a useful null hypothesis for quantitative researchers. By testing whether price data conforms to a random walk, they can determine if there are persistent patterns that can be exploited for profit or if the market is behaving efficiently.