The End of the Crypto-Diversification Myth

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