The End of the Crypto-Diversification Myth

41 Pages Posted: 16 Jun 2022 Last revised: 5 Aug 2022

See all articles by Antoine Didisheim

Antoine Didisheim

Swiss Finance Institute, UNIL

Luciano Somoza

University of Lausanne, HEC; Swiss Finance Institute

Date Written: June 16, 2022

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

JEL Classification: G11, G12, G29

Suggested Citation

Didisheim, Antoine and Somoza, Luciano, The End of the Crypto-Diversification Myth (June 16, 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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