The End of the Crypto-Diversification Myth
48 Pages Posted: 16 Jun 2022 Last revised: 30 Nov 2022
Date Written: November 2022
Cryptocurrencies and equities have exhibited a high and positive correlation since March 2020. Without obvious fundamental drivers, we show theoretically that trading flows by retail investors can drive this correlation. With a unique dataset of investor- level holdings from a bank offering trading accounts and cryptocurrency wallets, we show that retail investors tend to trade equities and cryptocurrencies simultaneously, in the same direction, and that this behavior emerged in March 2020. We provide suggestive evidence showing 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
JEL Classification: G11, G12, G29
Suggested Citation: Suggested Citation