The End of the Crypto-Diversification Myth
41 Pages Posted: 16 Jun 2022 Last revised: 5 Aug 2022
Date Written: June 16, 2022
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: Suggested Citation