Definition
The Efficient Market Hypothesis (EMH) is a financial concept that states that the financial markets reflect all available information on the price of assets at any time.
Understanding the Term
The concept was developed by economist Eugene Fama in the ‘60s, who argued that it’s nearly impossible for investors to gain an edge over the market in the long run. Both Bitcoin and other cryptocurrencies are known to react harshly to market events. This means that the cryptocurrency market is highly efficient, and its prices reflect accessible real-world information. The Efficient Market Hypothesis protects investors by explicitly stipulating that stocks, cryptocurrencies, and other markets should be perceived as speculative. This is beneficial, especially for newer investors in the cryptocurrency market who want to make quick returns by following experienced traders. EMH is a long-established theory that has been criticized in the past. There is no evidence to suggest that empirical data either proves or disproves the validity of the hypothesis. Many critics believe that emotional factors cause the undervaluation or overvaluation of stocks.
Takeaway
The efficient market hypothesis (EMH) or theory states that share prices reflect all information. Its proponents posit that investors can benefit from investing in a low-cost and passive portfolio.