Crypto: confirmed casino | Financial Times

Do you remember when retail brokers and wealth managers started with crypto?

Gerber Kawasaki’s notable Tesla bulls captured the bitcoin price peak in early 2021. Wisdom Tree and Ritholtz Wealth Management, when they teamed up to create a crypto index late last year, may have topped the entire market. Then the American wealth management giant Fidelity jumped on the wave in April last year, when bitcoin was down almost 20 percent for the year, but still traded above $ 35,000. It has since fallen below 21,000 dollars.

Presumably, these institutions decided to allow YOLO people to retire in cryptocurrencies for potential diversification benefits.

But a recent study from the Swiss Finance Institute bursts the bubble. A couple 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 offer crypto-trading services. Of the 77,364 active accounts they studied, about 21 percent traded cryptocurrency.

Their findings 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 have been strongly correlated because risk-hungry retailers have traded stocks and cryptocurrencies together.

Academics found that the trend started “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 cannot help but notice that the jump in retail occurred just when players’ regular venues were limited, with casinos closed and most sporting events canceled.

Regardless of the reasoning, the crypto traders caught by the survey seem to be the type of gambling:

. . . Looking at the stocks favored by agents holding cryptocurrencies, we observe a strong preference for growth stocks and speculative assets. When agents open a cryptocurrency wallet, their overall portfolio becomes more risky, with higher annualized returns at the expense of volatility that accumulates at a significantly lower Sharpe ratio (-10.23 percent, annually).

Academics also found that the stocks most preferred by crypto traders tend to be the most correlated with crypto prices. So these investors either buy both cryptocurrencies and speculative stocks at the same time, or sell both at once.

When these traders opened crypto wallets, they started checking their broker accounts much more often.

It is also interesting that these investors traded stocks less often when they opened a crypto wallet, so the performance of their non-crypto portfolios was improved.

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

Put another way:

Cryptocurrency investors trade more stocks on average, but less after opening a cryptocurrency wallet. This effect is not caused by the relative lower weight of shares in the portfolio or by the amount invested, as the dependent variable is scaled according to the shareholding. One possible interpretation is that investors pay less attention to stocks when trading cryptocurrencies and thus trade them less often. This result may explain some of the higher Sharpe ratios [in their stock portfolios.] In addition, we find that trading in shares is correlated with trading in cryptocurrency. In other words, when they open a wallet, investors trade fewer stocks, and they trade them at the same time as cryptocurrencies.

So these retailers are taking risks. But it is possible they simply have more money to spend on gambling, right?

Well, the data “suggests that crypto-oriented retail investors are on average poorer, younger, more masculine, more active and more eager to take risks,” the authors wrote.

You can tell had fun and stayed poor.