Wintermute: Liquidity, the lifeline of the crypto industry, is in crisis
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Wintermute: Liquidity, the lifeline of the crypto industry, is in crisis
Liquidity determines every cryptocurrency cycle.
Navigating Web3 tides with focused insightsAuthor: Jasper De Maere
Translation: TechFlow
Preface
Liquidity drives crypto cycles, and inflows via stablecoins, ETFs, and DATs (Digital Asset Trusts) have clearly slowed.
Global liquidity remains strong, but higher SOFR (Secured Overnight Financing Rate) is channeling funds into Treasuries rather than the crypto market.
Crypto is currently in a self-financing phase, with capital circulating internally while awaiting renewed inflows.
Liquidity determines every crypto cycle. While technological adoption may be the core long-term narrative for crypto, it is capital flows that truly drive price movements. Over recent months, momentum in inflows has weakened. Across the three main channels through which capital enters the crypto ecosystem—stablecoins, ETFs, and Digital Asset Trusts (DATs)—the pace of capital inflow has decelerated, placing crypto in a self-financing phase rather than an expansionary one.
Although technological adoption is an important driver, liquidity is what powers and defines each crypto cycle. This is not merely about market depth, but about the availability of capital itself. When global money supply expands or real interest rates decline, excess liquidity inevitably seeks risk assets, and historically—especially during the 2021 cycle—crypto has been one of the primary beneficiaries.
In previous cycles, liquidity primarily entered digital assets through stablecoins, which served as the key fiat on-ramp. As the industry matured, three major liquidity channels have emerged as critical determinants of new capital entering crypto:
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Digital Asset Trusts (DATs): Tokenized funds and yield structures linking traditional assets with on-chain liquidity.
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Stablecoins: The on-chain representation of fiat liquidity, providing foundational collateral for leverage and trading activity.
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ETFs: Access points in traditional finance offering BTC and ETH exposure for passive investors and institutional capital.
Combining ETF assets under management (AUM), DAT net asset value (NAV), and issued stablecoin supply allows for a reasonable estimate of total capital flowing into digital assets. The chart below shows the trend of these components over the past 18 months. At the bottom, it clearly demonstrates that changes in total volume closely correlate with the overall market capitalization of digital assets—price rises follow accelerating inflows.
The key observation is that inflows into DATs and ETFs have significantly slowed. Both performed strongly in Q4 2024 and Q1 2025, briefly rebounded in early summer, but this momentum has since faded. Liquidity (M2 money supply) is no longer naturally flowing into the crypto ecosystem as it did earlier in the year. From the beginning of 2024, total DAT and ETF规模 grew from approximately $40 billion to $270 billion, while stablecoin supply doubled from around $140 billion to about $290 billion—showing strong structural growth, yet also clear signs of stagnation.
This slowdown is significant because each channel reflects a different source of liquidity. Stablecoins reflect risk appetite within the crypto industry, DATs capture institutional demand for yield, and ETFs reflect broader traditional finance (TradFi) allocation trends. All three flattening simultaneously indicates an overall slowdown in new capital deployment—not just fund rotation between products. Liquidity hasn't disappeared; it's merely circulating within the system rather than expanding outward.
From a broader economic perspective beyond crypto, liquidity (M2 money supply) is not stagnant either. Although higher SOFR rates impose short-term constraints on liquidity by making cash yields attractive and locking capital into Treasuries, the global environment remains accommodative, and the U.S. quantitative tightening (QT) program has officially ended. The overall structural backdrop remains supportive, but for now, liquidity is choosing other outlets for risk expression, such as the stock market.
With reduced external inflows, market dynamics have become increasingly closed-loop. Capital rotates more between major coins and altcoin sectors rather than generating net new inflows, creating this "player-versus-player" (PvP) dynamic. This also explains why market rallies are short-lived and market breadth narrows, even as total AUM remains stable. Current volatility spikes are primarily driven by cascading liquidations rather than sustained trend formation.
Looking ahead, a significant recovery in any liquidity channel—such as renewed stablecoin minting, new ETF creations, or increased DAT issuance—would signal that macro liquidity is once again flowing back into digital assets. Until then, crypto remains in a self-financing phase, with capital circulating internally without value-accretive expansion.
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