Crypto: verified casino | Financial Times

Remember when retail brokers and asset managers got into crypto?

Well-known Tesla bulls at Gerber Kawasaki peaked Bitcoin price in early 2021. Wisdom Tree and Ritholtz Wealth Management may have put the entire market on top when they joined forces late last year to create a crypto index. Then US wealth management giant Fidelity jumped on the bandwagon last April, when Bitcoin fell almost 20 percent for the year but still traded above $35,000. It has since fallen below $21,000.

Presumably, these institutions decided to give people their retirement money in cryptocurrency YOLO because of the potential diversification benefits.

But a recent study by the Swiss Finance Institute bursts this bubble. A pair of academics – Luciano Somoza and Antoine Didisheim from the University of Lausanne – analyzed data from a random sample of customers of Swissquote, one of the few regulated banks that also offers crypto trading services. Of the 77,364 active accounts they examined, about 21 percent traded cryptocurrency.

Their results help explain why the correlation between the S&P 500 and Bitcoin prices looks like this:

In short, they argue that cryptocurrency and stock prices are highly correlated because risk-hungry retail customers traded stocks and cryptocurrencies together.

The scientists noted that the trend began “suddenly” in the early days of the pandemic in 2020, when the correlation between Bitcoin and the S&P 500 jumped from zero to almost 60 percent.

Somoza and Didisheim attribute this to retailers' stimulus checks - although Alphaville can't help but note that the jump in retail happened right when players' usual arenas were limited, casinos were closed and most sporting events were canceled.

Regardless of the reasoning, the crypto traders covered by the survey appear to be of the gambling variety:

. . . When we look at the stocks preferred by agents who hold cryptocurrencies, we observe a strong preference for growth stocks and speculative assets. When agents open a cryptocurrency wallet, their overall portfolio becomes riskier, with higher annualized returns, at the expense of volatility, which adds up to a significantly lower Sharpe ratio (-10.23 percent, annualized).

The researchers also found that the stocks most preferred by crypto traders tend to be the most highly correlated with crypto prices. So these investors either buy crypto and speculative stocks at once or sell both at once.

When these traders opened crypto wallets, they started checking their brokerage accounts much more frequently.

What's also fun is that these investors were less likely to trade stocks when they opened a crypto wallet, so the performance of their non-crypto portfolios improved.

Of course, if we assume that 1) frequent trading is bad for an individual investor's performance and 2) people who long to press a little financial risk button are more likely to open a cryptocurrency account, this result makes sense. As investors get their volatility correction from crypto, there is less need for YOLO to sell puts on Gamestop.

In other words:

Cryptocurrency investors trade more stocks on average, but less after opening a crypto wallet. This effect is caused neither by the relatively lower weighting of stocks in the portfolio nor by the amount invested, since the dependent variable is scaled by the stock holdings. One possible interpretation is that investors pay less attention to stocks when trading cryptocurrencies and therefore trade them less often. This result may explain some of the higher Sharpe ratios [in their stock portfolios.] Additionally, we find that stock trading is correlated with cryptocurrency trading. In other words, once they open a wallet, investors trade fewer stocks and trade cryptocurrencies at the same time.

So these retailers are taking risks. But it's possible they just have more money to play with, right?

Well, the data “suggests that crypto-focused retail investors are, on average, poorer, younger, more male, more active, and more willing to take risks,” the authors write.

You could say them Had fun and stayed poor.