The End of the Crypto-Diversification Myth

Luciano Somoza and Antoine Didisheim
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Luciano Somoza: University of Lausanne, HEC; Swiss Finance Institute
Antoine Didisheim: Swiss Finance Institute, UNIL

No 22-53, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We propose a mechanism explaining the recent high positive correlation between cryptocurrencies and the stock market. With a unique dataset of investor-level holdings from a bank offering trading accounts and cryptocurrency wallets, we show that retail investors’ net trading volumes of stocks and cryptocurrencies are positively correlated. Theoretically, this micro-level pattern translates into a cross-asset class correlation as long as the two markets are not fully integrated. We provide suggestive evidence showing that this micro-level pattern emerged in March 2020 and that stocks preferred by crypto-traders exhibit a stronger correlation with Bitcoin, especially when the cross asset retail volume is high.

Keywords: cryptocurrencies; Bitcoin; retail investors; correlation (search for similar items in EconPapers)
JEL-codes: G11 G12 G29 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2022-06
New Economics Papers: this item is included in nep-ban, nep-dem, nep-fmk, nep-pay and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2253

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