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The End of the Crypto-Diversification Myth

Author

Listed:
  • Luciano Somoza

    (University of Lausanne, HEC; Swiss Finance Institute)

  • Antoine Didisheim

    (Swiss Finance Institute, UNIL)

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.

Suggested Citation

  • Luciano Somoza & Antoine Didisheim, 2022. "The End of the Crypto-Diversification Myth," Swiss Finance Institute Research Paper Series 22-53, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2253
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4138159
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    References listed on IDEAS

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    More about this item

    Keywords

    cryptocurrencies; Bitcoin; retail investors; correlation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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