The End of the Crypto-Diversification Myth

50 Pages Posted: 16 Jun 2022 Last revised: 2 Apr 2024

See all articles by Antoine Didisheim

Antoine Didisheim

The University of Melbourne; Swiss Finance Institute

Martina Fraschini

University of Luxembourg

Luciano Somoza

ESSEC Business School

Date Written: March 30, 2024

Abstract

Cryptocurrencies and equities have exhibited a high and positive correlation since March 2020, making cryptocurrencies a poor diversification tool. We theoretically show that trading flows by retail investors can drive this correlation, even without obvious fundamental drivers. Using 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 in the same direction simultaneously. This behavior became prominent in March 2020. We provide evidence showing that stocks preferred by crypto-investors exhibit a stronger correlation with cryptocurrencies, especially when the cross-asset retail volume is high.

Keywords: cryptocurrency, bitcoin, correlation, households, retail investors

JEL Classification: G12, G14, G51

Suggested Citation

Didisheim, Antoine and Fraschini, Martina and Somoza, Luciano, The End of the Crypto-Diversification Myth (March 30, 2024). Available at SSRN: https://ssrn.com/abstract=4138159 or http://dx.doi.org/10.2139/ssrn.4138159

Antoine Didisheim

The University of Melbourne ( email )

Parkville, 3010
Australia
0435776821 (Phone)

Swiss Finance Institute ( email )

University of Melbourne
Melbourne, VA
Australia
0797605012 (Phone)

Martina Fraschini

University of Luxembourg ( email )

Luciano Somoza (Contact Author)

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

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