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A team of academic researchers from the International Hellenic University and Democritus University of Thrace in Greece recently published a paper supporting the “efficient market hypothesis” (EMH) for bitcoin trading.
EMH is a controversial theory that the researchers claim contributed to the development of models capable of outperforming the hodl strategy by nearly 300% in simulated crypto portfolios.
According to their research paper:
“We manage to generate models whose forecasts give investors the ability to record higher profits than the ones they would have if they followed the well-known buy and hold strategy.”
At the heart of EMH is the idea that an asset’s share price reflects its fair market value and all applicable market information. If true, it would be impossible to outperform the market by trying to time it or by predicting winning stocks intuitively.
Typically, proponents of EMH suggest that, rather than trying to beat the market with well-timed undervalued stock picks, investors should put funds in low-cost passive portfolios.
Meanwhile, opponents of EMH tend to dismiss this line of reasoning by pointing out that some investors, such as Warren Buffet, have made entire careers out of beating the market.
According to the research team in Greece, whose research in the aforementioned paper was limited to observations on the Bitcoin market, EMH can be applied to cryptocurrency trading as a replacement for the standard “buy and hold” or hodling approach to avoiding market volatility.
To test this, the researchers developed four distinct artificial intelligence models trained with multiple datasets. After training and testing, they selected models optimized against both ‘beat the market’ and hodling strategies.
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According to the team, the optimal model beat baseline returns by as much as 297%. This lends some credence to the idea that EMH can be a useful tool for bitcoin and cryptocurrency traders. However, it bears mention the authors conducted their research using historical data and simulated portfolio management.
The results of this study, while empirical, may do little to change the minds of those with a strong opinion against the efficacy of EMH.
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