The End of the Crypto-Diversification Myth

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