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The efficiency of bitcoin: a strongly typed genetic programming approach to smart electronic bitcoin markets

Manahov, V. and Urquhart, A. ORCID: https://orcid.org/0000-0001-8834-4243 (2020) The efficiency of bitcoin: a strongly typed genetic programming approach to smart electronic bitcoin markets. International Review of Financial Analysis. ISSN 1057-5219 (In Press)

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Abstract/Summary

Cryptocurrencies have gained a lot of attention since Bitcoin was first proposed by Satoshi Nakamoto in 2008. To extend the current literature in this area, we develop four smart electronic Bitcoin markets populated with different types of traders using a special adaptive form of the Strongly Typed Genetic Programming (STGP)-based learning algorithm. We apply the STGP technique to historical data of Bitcoin at the one-minute and five-minute frequencies to investigate the formation of Bitcoin market dynamics and market efficiency. We find that both Bitcoin markets populated by high-frequency traders (HFTs) are efficient at the one-minute frequency but inefficient at the five-minute frequency. This finding supports the argument that at the one-minute frequency investors are able to incorporate new information in a fast and rationale manner and not suffer from the noise associated with the five-minute frequency. We also contribute to the growing volume of cryptocurrency literature by demonstrating that zero-intelligence traders cannot reach market efficiency, therefore providing evidence against the hypothesis of Hayek (1945; 1968). One practical implication of this study is that we demonstrate that cryptocurrency market participants can apply artificial intelligence tools such as STGP to conduct behaviour-based market profiling.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:93822
Publisher:Elsevier

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