Reaction and Efficiency of the Cryptocurrency Market During the COVID-19 Pandemic: The Effect of Size and Supply

The COVID-19 pandemic might be bad news for all economic units, but it has become an unprecedented push factor for cryptocurrencies. These digital currencies have received overflowing investment through capital withdrawn from traditional investment instruments such as stocks and bonds. This chapter investigates the reaction and efficiency of Bitcoin and 40 altcoins from the World Health Organization’s announcement of the COVID-19 pandemic on 11 March 2020 and the first vaccination approval on 31 December 2020. Using the event study approach for the observation period from 1 January 2019 until 31 October 2021, we find that their reactions are significant and increasingly positive on the longer event windows. We also find that the size effect is highly significant in the cryptocurrency market compared to the stock markets. Cryptocurrencies with saturated supply react more drastically than those with unlimited supply, but the impact of supply is less pronounced than size. Meanwhile, Bitcoin appears to be more efficient than all altcoins except for the five largest cap. The results of this study would be beneficial for investors, particularly those searching for a safe haven or hedger in the cryptocurrency market.