Wintermute: Crypto volatility sharply declines, retail funds are rushing to escape into US stocks

Author: Wintermute

Translation: Deep Tide TechFlow

Deep Tide Introduction: This article, written by Wintermute OTC trader, provides an in-depth analysis of the fundamental reasons behind the current retail capital outflow in the crypto market. Historically, crypto bull markets have often been driven by retail speculation, but recent data shows that retail investors are pouring into U.S. stocks at record speeds, causing the crypto market and U.S. stocks to shift from “rising and falling together” to a “see-saw” pattern. As crypto market volatility decreases, entry and exit thresholds lower, and AI grants retail investors an analytical advantage in U.S. stocks, cryptocurrencies are no longer the first choice for retail speculation. Understanding this capital rotation logic can help us readjust multi-asset investment frameworks.

The full text is as follows:

Retail activity has always been a driving force behind the crypto market. Through speculation, reflexive dip-buying, and flexible capital rotation among various tokens, retail investors have defined every major cycle in crypto history. But recent data indicates that the relationship between retail and the crypto market is changing.

For some time, we have been warning that the U.S. stock market is attracting retail attention, which has come at the expense of altcoin liquidity. The latest data from JPMorgan’s strategy team, combined with our exclusive capital flow data, further suggests that: U.S. stocks and cryptocurrencies are becoming interchangeable risk assets.

Correlation Reversal

By overlaying Wintermute’s exclusive retail capital flow data in crypto with JPMorgan’s retail inflow data in U.S. stocks, we gain a new perspective on the relationship between retail activity in stocks and crypto.

Historically, these two have often moved in sync. Until the end of 2024, increased risk appetite usually meant both sides were buying, as they were both outlets for excess capital (referencing M2 data) and risk appetite. However, since late 2024, this correlation has broken down. Recently, we’ve seen the most severe divergence in history: retail investors are pouring into U.S. stocks at record speeds, while in the crypto market, they are holding steady on the sidelines.

Looking at a longer cycle, we use the total market cap of altcoins as a long-term proxy for retail crypto activity. It aligns closely with our retail capital flow data and has a more objective, long-term historical record. From 2022 to late 2024, crypto and U.S. stocks generally moved together, with retail viewing both as part of a high-risk portfolio. But the decoupling at the end of 2024 is particularly stark, with retail trading behavior becoming more short-term driven, volatile, and lacking structural coherence.

The rolling correlation between retail activity and altcoin market cap confirms this shift. The once fluctuating but overall positively correlated relationship has now turned negative. Retailers are now making “either-or” capital allocations between the two, rather than buying both simultaneously.

Focusing on 2025, combined with key catalyst events, this dynamic becomes even clearer. Several points stand out:

When U.S. stock market activity stagnates, memecoins and AI agents shine, as retail shifts speculative demand into these areas.

Whether during the April 2025 tariff policy announcement or recent periods, retail continues to aggressively dip-buy U.S. stocks.

Since October 10, capital has almost entirely shifted to U.S. stocks, and this trend persists.

Causality

It’s important to clarify: we do not believe retail in crypto is large enough to pull funds from U.S. stocks. On the contrary, the high retail enthusiasm in stocks has drained liquidity from the crypto market.

New data confirms this. Retail activity in U.S. stocks has become a new variable; crypto investors should closely monitor this indicator to identify windows where retail capital might provide sustained buying opportunities for crypto.

Volatility Itself Is the Product

While there are many reasons, one core reason retail remains so active and attracted to crypto is its volatility profile. Volatility itself is a product. This was the main driver that initially drew retail into crypto.

However, although crypto’s volatility still far exceeds that of U.S. stocks, its realized volatility has been undergoing structural compression, and this trend is hard to reverse. The volatility ratio between BTC and the Nasdaq 100 (NDX) has been declining, and in the first half of 2025, this ratio was compressed to below two times.

Thoughts on key driving factors:

Market Maturity. Increasing numbers of institutional investors, along with new liquidity tools like ETFs and DATs, have suppressed the typical reflexive volatility surges seen in early cycles.

Market Size. The total market cap of crypto now stands at $2.3 trillion. Even after a 40% retracement from all-time highs, the amount of capital needed to push the market higher is much larger than five years ago.

As volatility compresses, the core selling point of crypto for retail—its dramatic swings that defined the 2021-2022 bull cycle and attracted an entire generation of retail—has diminished. For retail seeking volatility, U.S. stocks are becoming increasingly attractive.

Technology-Driven Factors

Beyond structural changes in the crypto market itself, technological factors are accelerating this capital rotation, a topic that is not discussed enough.

Access to Investment Channels. Fintech and traditional brokerage platforms have integrated crypto trading (or crypto-native platforms have integrated U.S. stock trading), which indeed lowers entry barriers. But the deeper impact lies in “capital withdrawal.” In previous cycles, complex deposit and withdrawal processes kept funds locked in once entered, fueling organic rotation among tokens. Today, seamless deposit and withdrawal channels mean funds can move freely and unobstructed between crypto and U.S. stocks.

Cognitive Edge. Retail investors seem increasingly attracted to U.S. stocks partly because they gain a new advantage through AI. Large language models (LLMs) greatly enhance retail analysis capabilities, creating an illusion of a fair fight with institutions.

But in crypto, this feeling does not exist. While you can analyze crypto projects based on data, the field lacks a consensus valuation framework and token value capture mechanisms. Meanwhile, the universe of investable tokens keeps expanding infinitely, making it hard for retail to feel they hold a true “advantage.”

Conclusion

Retail investors used to be the most reliable reflexive demand source in crypto, but now their risk appetite is increasingly being satisfied elsewhere. U.S. stocks offer highly competitive volatility, enhanced analytical advantages, and capital can seamlessly switch between crypto and stocks via the same app. While crypto still has a place in retail portfolios, it is now just one of many tools in the game, no longer the primary vehicle for speculation.

This shift should also reshape how investors view the market. Some time-tested indicators have already become ineffective. For crypto investors, success now requires more than just identifying leading risk appetite indicators and combining them with native crypto frameworks. Investors need to increasingly view crypto through a multi-asset portfolio lens, just as it has become standard practice in U.S. stocks and fixed income markets.