Cryptocurrency Market Efficiency: A Test of Korean Markets

In this paper, we provide empirical evidence that supports the existence of serious imbalances in the recent cryptocurrency prices in Korea. From the standpoint of equilibrium, the prices of three major cryptocurrencies (i.e., Bitcoin, Ethereum, Ripple) in Korea are not compatible with the law of one price (LOP) even after controlling for risk arising from cross-border arbitrage attempts. This implies high volatility-a distinct feature of the cryptocurrency marketis not a crucial factor that deters cross-border arbitrage. We conjecture robust demand on cryptocurrencies coupled with various structural market frictions and the limited supply may have supported the persistent deviation from the equilibrium level of cryptocurrency price. We also identify the equilibrium gap contains a unit root in its dynamic process, which suggests policy measures aiming to extenuate excessive demands on cryptocurrencies will have a stabilizing effect on cryptocurrency prices persistently. At the same time, any positive shock on investors’ preferences on cryptocurrencies can also offset the effectiveness of policies, which makes the current situation very complicated.