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

Retail investors are flooding into the U.S. stock market at record speeds, causing the crypto market and U.S. stocks to shift from “rising and falling together” to a “see-saw” pattern.

Author: Wintermute

Translation: Deep潮 TechFlow

Deep潮 Overview: This article, written by Wintermute OTC traders, provides an in-depth analysis of the fundamental reasons behind the current outflow of retail funds from the crypto market. Historically, crypto bull markets have often been driven by retail speculation, but recent data shows that retail investors are rushing into U.S. stocks at record levels, turning the correlation between crypto and stocks from “synchronous movement” to a “see-saw.” As crypto market volatility declines, entry barriers lower, and AI enhances retail analysis in stocks, cryptocurrencies are no longer the first choice for retail speculation. Understanding this capital rotation helps us readjust multi-asset investment frameworks.

Full Text:

Retail activity has always driven 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 the latest data indicates that the relationship between retail and the crypto market is changing.

For some time, we’ve 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 fund flow data, further suggests that: U.S. stocks and cryptocurrencies are becoming interchangeable risk assets.

Reversal of Correlation

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

Historically, these two markets tended to move in sync. Until late 2024, risk appetite increases usually meant both sides were buying, as they both represented excess capital (referencing M2 data) and a release of risk appetite. However, since late 2024, this correlation has broken down. Recently, we’ve seen the most severe divergence in history: retail investors are rushing into U.S. stocks at record speeds, while remaining on the sidelines in crypto.

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 fund 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 especially pronounced, 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. Once a relationship with some volatility but overall positive correlation, it has now turned negative. Retailers are now allocating funds by choosing between the two, rather than buying both simultaneously.

Focusing on 2025, combined with key catalyst events, this dynamic becomes even clearer. Several patterns are especially evident:

• When U.S. stock 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.
• After October 10, funds 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 drain funds from 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 funds might provide sustained buying support for crypto.

Volatility as a 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.

Despite crypto’s volatility still far exceeding that of stocks, its realized volatility has been structurally compressing, and this trend is hard to reverse. The volatility ratio of BTC to the Nasdaq 100 (NDX) has been declining, and in the first half of 2025, this ratio was compressed to below two.

Key factors driving this:

• Market Maturation: Increasing participation of institutional investors, along with new liquidity tools like ETFs and DEXs, has suppressed the typical reflexive volatility surges seen in early cycles.
• Market Size: The total crypto market cap is now around $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 volatility—diminishes. The dramatic surges and crashes that defined the 2021-2022 bull cycle, attracting an entire generation of retail investors, are now a thing of the past. For retail traders 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—an aspect not yet fully discussed in the market.

• Access to Investment Channels: Fintech and traditional broker platforms integrating crypto trading (or crypto-native platforms integrating U.S. stock trading) have lowered entry barriers. But the deeper impact lies in “capital withdrawal.” Previously, complex deposit and withdrawal processes kept funds locked in crypto once entered, fueling organic rotation among tokens. Now, seamless deposit and withdrawal channels allow funds to flow freely between crypto and stocks without friction.
• Cognitive Edge: Retail investors seem increasingly attracted to stocks partly because they gain a new advantage through AI. Large language models (LLMs) significantly enhance retail analysis capabilities, creating an illusion of being able to compete fairly with institutions.

In crypto, this feeling does not exist. While you can analyze crypto projects based on data, the lack of a consensus valuation framework and token value capture mechanism, combined with an ever-expanding universe of investable assets, makes it hard for retail to feel they have a real “edge.”

Conclusion

Retail investors used to be the most reliable reflexive demand source for crypto markets, 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 observe markets. Some well-tested indicators have already become ineffective. For crypto investors, success now requires more than just tracking 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.