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

The University of Melbourne; Swiss Finance Institute

Luciano Somoza

ESSEC Business School

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

The University of Melbourne ( email )

Parkville, 3010
Australia
0435776821 (Phone)

Swiss Finance Institute ( email )

University of Melbourne
Melbourne, VA
Australia
0797605012 (Phone)

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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