Price Delay and Market Efficiency of Cryptocurrencies: The Impact of Liquidity and Volatility during the COVID-19 Pandemic

The rise of cryptocurrencies as alternative financial investments, with potential safe-haven and hedging properties, highlights the need to examine their market efficiency. This study is the first to investigate the combined impact of liquidity and volatility features of cryptocurrencies on their price delays. Using a wide spectrum of cryptocurrencies, we investigate whether the COVID-19 outbreak has affected market efficiency by studying price delays to market information. We find that as liquidity increases and volatility decreases, cryptocurrencies demonstrate stronger market efficiency. Additionally, we show that price delay differences during the COVID-19 outbreak increase with higher levels of illiquidity, particularly for highly volatile quintiles. We suggest that perceived risks and high transaction costs in illiquid and highly volatile cryptocurrencies reduce active traders’ willingness to engage in arbitrage trading, leading to increased market inefficiencies. Our findings are relevant to investors, aiding in improving their decision-making processes and enhancing their investment efficiency. Our paper also presents significant implications for policymakers, emphasizing the need for reforms aimed at enhancing the speed at which information is incorporated into cryptocurrency returns. These reforms would help mitigate market distortions and increase the sustainability of cryptocurrency markets.