IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp2253.html
   My bibliography  Save this paper

The End of the Crypto-Diversification Myth

Author

Listed:
  • Luciano Somoza

    (University of Lausanne, HEC; Swiss Finance Institute)

  • Antoine Didisheim

    (Swiss Finance Institute, UNIL)

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.

Suggested Citation

  • Luciano Somoza & Antoine Didisheim, 2022. "The End of the Crypto-Diversification Myth," Swiss Finance Institute Research Paper Series 22-53, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2253
    as

    Download full text from publisher

    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4138159
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Schilling, Linda & Uhlig, Harald, 2019. "Some simple bitcoin economics," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 16-26.
    2. Sebastien Betermier & Laurent E. Calvet & Paolo Sodini, 2017. "Who Are the Value and Growth Investors?," Journal of Finance, American Finance Association, vol. 72(1), pages 5-46, February.
    3. Thomas B. Astebro & Luís Santos-Pinto & J. Mata, 2009. "Preferences for Skew," Post-Print hal-00654369, HAL.
    4. Maarten Meeuwis & Jonathan A. Parker & Antoinette Schoar & Duncan Simester, 2022. "Belief Disagreement and Portfolio Choice," Journal of Finance, American Finance Association, vol. 77(6), pages 3191-3247, December.
    5. William N. Goetzmann & Alok Kumar, 2008. "Equity Portfolio Diversification," Review of Finance, European Finance Association, vol. 12(3), pages 433-463.
    6. Robin Greenwood & Toomas Laarits & Jeffrey Wurgler, 2022. "Stock Market Stimulus," NBER Working Papers 29827, National Bureau of Economic Research, Inc.
    7. Sabrina T Howell & Marina Niessner & David Yermack & Jiang Wei, 2020. "Initial Coin Offerings: Financing Growth with Cryptocurrency Token Sales," The Review of Financial Studies, Society for Financial Studies, vol. 33(9), pages 3925-3974.
    8. Markus K. Brunnermeier & Harold James & Jean-Pierre Landau, 2019. "The Digitalization of Money," Working Papers 2019-13, Princeton University. Economics Department..
    9. Andreas Fagereng & Luigi Guiso & Luigi Pistaferri, 2016. "Back to Background Risk," EIEF Working Papers Series 1602, Einaudi Institute for Economics and Finance (EIEF), revised Jan 2016.
    10. Vimal Balasubramaniam & John Y. Campbell & Tarun Ramadorai & Benjamin Ranish, 2023. "Who Owns What? A Factor Model for Direct Stockholding," Journal of Finance, American Finance Association, vol. 78(3), pages 1545-1591, June.
    11. Markus K. Brunnermeier & Jonathan A. Parker & Christian Gollier, 2007. "Optimal Beliefs, Asset Prices, and the Preference for Skewed Returns," American Economic Review, American Economic Association, vol. 97(2), pages 159-165, May.
    12. Peng, Lin & Xiong, Wei, 2006. "Investor attention, overconfidence and category learning," Journal of Financial Economics, Elsevier, vol. 80(3), pages 563-602, June.
    13. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    14. Makarov, Igor & Schoar, Antoinette, 2020. "Trading and arbitrage in cryptocurrency markets," LSE Research Online Documents on Economics 100409, London School of Economics and Political Science, LSE Library.
    15. Thomas Astebro & José Mata & Luis Santos-Pinto, 2009. "Preference for Skew in Lotteries: Evidence from the Laboratory," Cahiers de Recherches Economiques du Département d'économie 09.09, Université de Lausanne, Faculté des HEC, Département d’économie.
    16. Bruno Biais & Christophe Bisière & Matthieu Bouvard & Catherine Casamatta, 2019. "The Blockchain Folk Theorem," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1662-1715.
    17. Yukun Liu & Aleh Tsyvinski & Xi Wu, 2019. "Common Risk Factors in Cryptocurrency," NBER Working Papers 25882, National Bureau of Economic Research, Inc.
    18. Gandal, Neil & Hamrick, JT & Moore, Tyler & Oberman, Tali, 2018. "Price manipulation in the Bitcoin ecosystem," Journal of Monetary Economics, Elsevier, vol. 95(C), pages 86-96.
    19. Callaway, Brantly & Sant’Anna, Pedro H.C., 2021. "Difference-in-Differences with multiple time periods," Journal of Econometrics, Elsevier, vol. 225(2), pages 200-230.
    20. Sean Foley & Jonathan R Karlsen & Tālis J Putniņš, 2019. "Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed through Cryptocurrencies?," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1798-1853.
    21. Wolfgang Karl Härdle & Campbell R Harvey & Raphael C G Reule, 2020. "Understanding Cryptocurrencies," Journal of Financial Econometrics, Oxford University Press, vol. 18(2), pages 181-208.
    22. L. C. Garcia Del Molino & I. Mastromatteo & Michael Benzaquen & J.-P. Bouchaud, 2020. "The Multivariate Kyle model: More is different," Post-Print hal-02323433, HAL.
    23. Makarov, Igor & Schoar, Antoinette, 2020. "Trading and arbitrage in cryptocurrency markets," Journal of Financial Economics, Elsevier, vol. 135(2), pages 293-319.
    24. Grinblatt, Mark & Keloharju, Matti & Linnainmaa, Juhani T., 2012. "IQ, trading behavior, and performance," Journal of Financial Economics, Elsevier, vol. 104(2), pages 339-362.
    25. Dorn, Daniel & Huberman, Gur, 2010. "Preferred risk habitat of individual investors," Journal of Financial Economics, Elsevier, vol. 97(1), pages 155-173, July.
    26. Goodman-Bacon, Andrew, 2021. "Difference-in-differences with variation in treatment timing," Journal of Econometrics, Elsevier, vol. 225(2), pages 254-277.
    27. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, April.
    28. Lin William Cong & Ye Li & Neng Wang, 2021. "Tokenomics: Dynamic Adoption and Valuation [The demand of liquid assets with uncertain lumpy expenditures]," The Review of Financial Studies, Society for Financial Studies, vol. 34(3), pages 1105-1155.
    29. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 261-292.
    30. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
    31. Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(3), pages 317-355.
    32. Easley, David & O'Hara, Maureen & Basu, Soumya, 2019. "From mining to markets: The evolution of bitcoin transaction fees," Journal of Financial Economics, Elsevier, vol. 134(1), pages 91-109.
    33. Gur Huberman & Jacob D Leshno & Ciamac Moallemi, 2021. "Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System [Blockchain Economics]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(6), pages 3011-3040.
    34. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    35. Barber, Brad M. & Odean, Terrance, 2013. "The Behavior of Individual Investors," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1533-1570, Elsevier.
    36. Todd Mitton & Keith Vorkink, 2007. "Equilibrium Underdiversification and the Preference for Skewness," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1255-1288.
    37. Wolfgang Karl Hardle & Campbell R. Harvey & Raphael C. G. Reule, 2020. "Editorial: Understanding Cryptocurrencies," Papers 2007.14702, arXiv.org.
    38. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
    39. Yukun Liu & Aleh Tsyvinski, 2021. "Risks and Returns of Cryptocurrency," The Review of Financial Studies, Society for Financial Studies, vol. 34(6), pages 2689-2727.
    40. Andreas Fagereng & Luigi Guiso & Luigi Pistaferri, 2018. "Portfolio Choices, Firm Shocks, and Uninsurable Wage Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 437-474.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kogan, Shimon & Makarov, Igor & Niessner, Marina & Schoar, Antoinette, 2024. "Are cryptos different? Evidence from retail trading," Journal of Financial Economics, Elsevier, vol. 159(C).
    2. Ms. Natasha X Che & Alexander Copestake & Davide Furceri & Tammaro Terracciano, 2023. "The Crypto Cycle and US Monetary Policy," IMF Working Papers 2023/163, International Monetary Fund.
    3. Kogana, Shimon & Makarov, Igor & Niessnerc, Marina & Schoar, Antoinette, 2024. "Are cryptos different? Evidence from retail trading," LSE Research Online Documents on Economics 122266, London School of Economics and Political Science, LSE Library.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vimal Balasubramaniam & John Y. Campbell & Tarun Ramadorai & Benjamin Ranish, 2023. "Who Owns What? A Factor Model for Direct Stockholding," Journal of Finance, American Finance Association, vol. 78(3), pages 1545-1591, June.
    2. Kogan, Shimon & Makarov, Igor & Niessner, Marina & Schoar, Antoinette, 2024. "Are cryptos different? Evidence from retail trading," Journal of Financial Economics, Elsevier, vol. 159(C).
    3. Kogana, Shimon & Makarov, Igor & Niessnerc, Marina & Schoar, Antoinette, 2024. "Are cryptos different? Evidence from retail trading," LSE Research Online Documents on Economics 122266, London School of Economics and Political Science, LSE Library.
    4. Igor Makarov & Antoinette Schoar, 2021. "Blockchain Analysis of the Bitcoin Market," NBER Working Papers 29396, National Bureau of Economic Research, Inc.
    5. Chen, Bin-xia & Sun, Yan-lin, 2024. "Risk characteristics and connectedness in cryptocurrency markets: New evidence from a non-linear framework," The North American Journal of Economics and Finance, Elsevier, vol. 69(PA).
    6. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    7. Sakkas, Athanasios & Urquhart, Andrew, 2024. "Blockchain factors," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 94(C).
    8. Andreas Hackethal & Tobin Hanspal & Dominique M Lammer & Kevin Rink, 2022. "The Characteristics and Portfolio Behavior of Bitcoin Investors: Evidence from Indirect Cryptocurrency Investments [The investor in structured retail products: advice driven or gambling oriented]," Review of Finance, European Finance Association, vol. 26(4), pages 855-898.
    9. Ye Li & Simon Mayer & Simon Mayer, 2021. "Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking," CESifo Working Paper Series 9260, CESifo.
    10. Lin William Cong & Yizhou Xiao, 2021. "Categories and Functions of Crypto-Tokens," Springer Books, in: Maurizio Pompella & Roman Matousek (ed.), The Palgrave Handbook of FinTech and Blockchain, edition 1, chapter 0, pages 267-284, Springer.
    11. Andreas Oehler & Julian Schneider, 2022. "Gambling with lottery stocks?," Journal of Asset Management, Palgrave Macmillan, vol. 23(6), pages 477-503, October.
    12. Bruno Biais & Christophe Bisière & Matthieu Bouvard & Catherine Casamatta & Albert J. Menkveld, 2023. "Equilibrium Bitcoin Pricing," Journal of Finance, American Finance Association, vol. 78(2), pages 967-1014, April.
    13. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    14. Hinzen, Franz J. & John, Kose & Saleh, Fahad, 2022. "Bitcoin’s limited adoption problem," Journal of Financial Economics, Elsevier, vol. 144(2), pages 347-369.
    15. Matteo Benetton & Giovanni Compiani, 2024. "Investors’ Beliefs and Cryptocurrency Prices," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 14(2), pages 197-236.
    16. Zhang, Wei & Li, Yi & Xiong, Xiong & Wang, Pengfei, 2021. "Downside risk and the cross-section of cryptocurrency returns," Journal of Banking & Finance, Elsevier, vol. 133(C).
    17. Liebi, Luca J., 2022. "Is there a value premium in cryptoasset markets?," Economic Modelling, Elsevier, vol. 109(C).
    18. Makarov, Igor & Schoar, Antoinette, 2021. "Blockchain analysis of the Bitcoin market," LSE Research Online Documents on Economics 118897, London School of Economics and Political Science, LSE Library.
    19. Emiliano S Pagnotta, 2022. "Decentralizing Money: Bitcoin Prices and Blockchain Security," The Review of Financial Studies, Society for Financial Studies, vol. 35(2), pages 866-907.
    20. Barber, Brad M. & Odean, Terrance, 2013. "The Behavior of Individual Investors," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1533-1570, Elsevier.

    More about this item

    Keywords

    cryptocurrencies; Bitcoin; retail investors; correlation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp2253. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.