Does the speculative frenzy in bitcoin spread to the stock market?

Abstract

We find that the speculative frenzy in bitcoin affects stock prices. Stocks that have non-fundamental return co-movement with bitcoin exhibit temporary over-valuation and subsequent return reversal that exceeds −1% per month. Instrumental variables analysis using Tether flows and authorizations supports a causal interpretation of our findings. Overall, the evidence is consistent with the rapid spread of speculative interest in high skewness strategies from the social transmission of ideas and suggests that investors may evaluate these stocks in a way that is consistent with the predictions of prospect theory.

Keywords: Cryptocurrency; social transmission bias; prospect theory

JEL Classification: G12, G14