The End of the Crypto-Diversification Myth

48 Pages Posted: 16 Jun 2022 Last revised: 30 Nov 2022

See all articles by Antoine Didisheim

Antoine Didisheim

Swiss Finance Institute, UNIL

Luciano Somoza

University of Lausanne, HEC; Swiss Finance Institute

Date Written: November 2022

Abstract

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

Didisheim, Antoine and Somoza, Luciano, The End of the Crypto-Diversification Myth (November 2022). Swiss Finance Institute Research Paper No. 22-53, Available at SSRN: https://ssrn.com/abstract=4138159 or http://dx.doi.org/10.2139/ssrn.4138159

Antoine Didisheim

Swiss Finance Institute, UNIL ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
0797605012 (Phone)

Luciano Somoza (Contact Author)

University of Lausanne, HEC ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

HOME PAGE: http://www.lucianosomoza.com

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
+41 797322881 (Phone)

HOME PAGE: http://www.lucianosomoza.com

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