Market Efficiency and Crypto Dynamics in a Downward Market Trend

Abstract

The study aims to analyze and distinguish the patterns of the volatility dynamics of Bitcoin and Bitcoin-based ETFs and that of established capital markets in the context of crisis market dynamics characterized by significant and persistent neg-ative market trends. In order to investigate these the assumptions of the Efficient Markets Hypothesis are used and the measurement of market efficiency and the magnitude of impact of market shocks are carried out. By investigating the vola-tility characteristics of Bitcoin and its underlying ETF, the iShares Bitcoin Trust ETF (IBIT), on the one hand, and on the other hand, the established equity markets represented by the S&P 500 Market Index and the NASDAQ Composite Index, it is possible to achieve a characteristic distinction in the patterns of volatility dynam-ics in the context of a crisis and a pronounced downward market trend. The tem-poral aspect of the study covers two specific periods characterized by significant fluctuations in global capital markets, namely the global pandemic of COWID-19 and the intensification of protectionist sentiment in the United States following the election and inauguration of President Donald Trump's administration during his second presidential term in the period 2024-2025. The empirical results enable us to record the existence of hedging potential of the use of Bitcoin, and its underlying ETF, against established volatility dynamics of the capital markets. The pattern of volatility dynamics of Bitcoin between the two crisis periods studied shows a development that brings it closer to equity markets in the 2024-2025 pe-riod, but at the same time retains the hedging potential expressed by a signifi-cantly lower impact in a down market environment of the negative market infor-mation compared to equity markets. Bitcoin's hedging potential is demonstrated not only in terms of the volatility dynamics of the cryptocurrency itself, but also relative to the Bitcoin-based ETF, the iShares Bitcoin Trust ETF (IBIT).