Wintermute: Crypto volatility sharply drops, retail funds are frantically fleeing to US stocks Author: Wintermute Compiled: Deep Tide TechFlow Deep Tide Introduction: This article is written by Wintermute OTC trader and deeply analyzes the fundamental reasons for the loss of retail funds in the current cryptocurrency market. In history, cryptocurrency bull markets were often driven by speculation by individual investors, but the latest data shows that retail investors are flooding into the US stock market at a record pace, causing the cryptocurrency market and the US stock market to shift from "rising and falling together" to a "seesaw". With the decrease in volatility in the cryptocurrency market, the lowering of entry and exit barriers, and the analytical advantage given to retail investors by AI in the US stock market, cryptocurrency is no longer the first choice for retail speculation. Understanding the logic of this capital rotation will help us readjust our multi asset investment framework. The activity of individual investors has been driving the cryptocurrency market. Through speculation, reflexively buying on dips, and flexible fund rotation between various tokens, retail investors have defined every major cycle in the history of cryptocurrency. But the latest data suggests that the relationship between retail investors and the cryptocurrency market is changing. For some time now, we have been reminding everyone that the US stock market is attracting the attention of retail investors, which sacrifices the liquidity of altcoins. The latest data from JP Morgan's strategy department, combined with our exclusive fund flow data, further indicates that US stocks and cryptocurrencies are becoming interchangeable risk assets. By overlaying Wintermute's exclusive cryptocurrency retail fund flow data with JPMorgan's retail US stock fund flow data, we have gained a new perspective on examining the relationship between retail investor activity in the US stock and cryptocurrency markets through association reversal. In history, the two usually resonate at the same frequency. Until the end of 2024, the rise in risk appetite often means that both sides are buying, because to some extent, they are both outlets for excess capital (referring to M2 data) and risk appetite. However, since the end of 2024, this association has broken down. Today we witnessed the most serious divergence in recent history: retail investors are pouring into US stocks at a record pace, while in the cryptocurrency market, they are choosing to hold their money and wait. Looking at the extended cycle, we use the total market value of altcoins as a long-term alternative indicator of retail cryptocurrency activity. It is highly compatible with our retail fund flow data and has a more objective and long-term historical record. From 2022 to the end of 2024, the trend of cryptocurrencies and US stocks is generally consistent, and retail investors consider both as part of high-risk investment portfolios. But the decoupling at the end of 2024 is particularly prominent, and retail trading behavior has become more short-term driven, volatile, and lacking in structure. The rolling correlation between retail investor activity and the market value of altcoins confirms this shift. The relationship that used to have fluctuations but overall positive correlation has now become negative correlation. Retail investors are now making a "two choice" fund allocation between these two, rather than buying at the same time. Focusing on 2025, combined with key catalyst events, this dynamic change will become clearer. There are several points that are very evident: when the activity of the US stock market stagnates, Memecoin and AI agents usher in a shining moment, and retail investors shift their speculative demand to these areas. Whether during the announcement of tariff policies in April 2025 or in recent times, retail investors have continued to aggressively buy US stocks at low prices. After October 10th, funds almost completely shifted towards the US stock market, and this trend continues to this day. The causal relationship must be clear: we do not believe that the retail investors in the cryptocurrency market are large enough to withdraw funds from the US stock market. On the contrary, it is the enthusiasm of retail investors in the US stock market that has drained the liquidity of the cryptocurrency market. The new data also confirms this. The activity level of retail investors in the US stock market has become a new variable, and cryptocurrency investors should closely monitor this indicator to find when retail funds can provide a continuous buying window for the cryptocurrency market. The volatility itself is a product, although there are many reasons, one of the core reasons why retail investors are so active and attracted to the cryptocurrency market is the volatility characteristics of the asset. Volatility itself is a product. This is precisely the core driving force that brought retail investors into the crypto industry in the first place. However, although the volatility of the cryptocurrency market still far exceeds that of the US stock market, its realized volatility has been undergoing structural compression, and this trend is difficult to reverse. The volatility ratio of BTC to the Nasdaq 100 Index (NDX) has been consistently decreasing, and in the first half of 2025, this ratio has even been compressed to less than twice. Thoughts on some key driving factors: the market is maturing. The increasing number of mature investors, coupled with the emergence of new liquidity tools such as ETFs and DATs, has suppressed the typical volatility surges caused by conditioned reflexes in early cycles. Market size. At present, the total market value of the cryptocurrency market has reached 2.3 trillion US dollars. Even if it falls back 40% from its historical high (ATH), the amount of funds needed to drive the market up now is much larger than five years ago. With the compression of volatility, the core selling point of cryptocurrencies attracting retail investors has also diminished. The kind of boom and bust that defined the 21-22 year bull market cycle and attracted a whole generation of retail investors to enter the market is now gone forever. For retail investors who pursue volatility, the US stock market is becoming increasingly attractive. Besides the structural changes in the cryptocurrency market itself, technological driving factors are also accelerating this capital rotation, which has not been fully discussed in the market. Opening up investment channels. Fintech and traditional brokerage platforms have integrated cryptocurrency trading (or crypto native platforms have integrated US stock trading), which has indeed lowered the entry threshold, but its more profound impact is reflected in the "withdrawal of funds". In previous cycles, the complex deposit and withdrawal process locked funds in once they entered the cryptocurrency market, thereby driving organic rotation between different tokens. Nowadays, the equally smooth entry and exit channels mean that funds can freely shuttle between cryptocurrencies and US stocks without any obstacles. Cognitive advantage (The edge). Retail investors seem to be increasingly attracted to the US stock market, partly because they have gained a new advantage through AI. The Large Language Models (LLMs) greatly enhance the analytical abilities of individual investors, creating an illusion that they can compete fairly with institutions. But in the cryptocurrency market, this feeling does not exist. Although you can also analyze encryption projects based on data, the lack of a consensus valuation framework and token value capture mechanism in the field of encryption, coupled with the infinite expansion of investable targets, makes it difficult for retail investors to find the feeling of "having an advantage" here. Conclusion: Retail investors used to be the most reliable source of contingent demand in the cryptocurrency market, but now their risk appetite is increasingly being met elsewhere. The US stock market provides highly competitive volatility, giving retail investors an increasing analytical advantage, and through the same app on their mobile phones, funds can seamlessly switch between the cryptocurrency market and the US stock market. Cryptocurrencies still have a place in retail investors' investment portfolios, but they are now just one of many game tools and no longer the preferred carrier for speculation. This transformation should also reshape investors' perspective on observing the market. Some tried and tested indicators have become invalid. For cryptocurrency investors, simply searching for leading indicators of risk appetite and combining them with the native framework of cryptocurrency is no longer enough to achieve success. Investors need to increasingly view cryptocurrencies through a multi asset portfolio perspective, just as it has become standard practice in the US stock and fixed income markets.