Wintermute: Liquidity, the lifeline of the crypto industry, is in critical danger

Author: Jasper De Maere

Compiled by: Deep潮 TechFlow

Preface

Liquidity drives the cryptocurrency cycle, but inflows through stablecoins, ETFs, and DATs (Digital Asset Trusts) have noticeably slowed.

Global liquidity remains strong, but higher SOFR (Secured Overnight Financing Rate) is directing funds toward government bonds rather than the crypto market.

Currently, cryptocurrencies are in a self-financing phase, with capital cycling internally, awaiting new inflows to resume.

Liquidity determines every crypto cycle. While long-term technological applications may be the core driver of the crypto story, it is the movement of funds that truly influences price changes. Over the past few months, the momentum of capital inflows has weakened. In the three main channels through which capital enters the crypto ecosystem—stablecoins, ETFs, and digital asset vaults (DATs)—fund flows are slowing, causing cryptocurrencies to be in a self-financing rather than expansion phase.

Although technological adoption is an important driver, liquidity is the key factor that drives and defines each crypto cycle. This is not just about market depth but also about the availability of funds themselves. When global money supply expands or real interest rates decline, excess liquidity inevitably seeks risk assets. Historically, especially during the 2021 cycle, cryptocurrencies have been among the biggest beneficiaries.

In previous cycles, liquidity mainly entered the digital asset space via stablecoins, which serve as the primary fiat on-ramp. As the industry matures, three major liquidity channels have become critical in determining new capital inflows into crypto:

Digital Asset Vaults (DATs): Tokenized funds and yield structures connecting traditional assets with on-chain liquidity.

Stablecoins: On-chain representations of fiat liquidity, providing collateral for leverage and trading activities.

ETFs: Entry points in traditional finance offering BTC and ETH exposure for passive investment and institutional capital.

By combining ETF assets under management (AUM), DAT net asset value (NAV), and the number of issued stablecoins, it is possible to reasonably estimate the 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 indicates that total volume changes are closely related to the overall market cap of digital assets; when inflows accelerate, prices tend to rise.

A key observation is that the inflows into DATs and ETFs have significantly slowed. Both experienced strong performance in Q4 2024 and Q1 2025, with a brief uptick in early summer, but this momentum has since waned. Liquidity (M2 money supply) is no longer flowing into the crypto ecosystem as naturally as at the start of the year. Since early 2024, the total size of DATs and ETFs has grown from approximately $40 billion to $270 billion, while stablecoins have doubled from about $140 billion to roughly $290 billion. Although this indicates robust structural growth, it also shows a clear slowdown.

This deceleration is crucial because each channel reflects different sources of liquidity. Stablecoins mirror risk appetite within the crypto industry, DATs capture institutional yield demand, and ETFs reflect broader trends in traditional finance (TradFi) allocations. The simultaneous slowdown across all three suggests a general reduction in new capital deployment, rather than just a rotation between products. Liquidity has not disappeared but is now cycling within the system rather than expanding.

From a broader economic perspective outside crypto, liquidity (M2 money supply) is also not stagnant. Although higher SOFR rates have temporarily constrained liquidity, making cash yields attractive and locking funds in government bonds, the global environment remains accommodative. The U.S. has officially ended quantitative tightening (QT). The overall structural backdrop remains supportive; currently, liquidity is being channeled into other risk assets, such as equities.

As external inflows decrease, market dynamics become more insular. Capital is shifting more between mainstream coins and altcoins rather than new net inflows, creating a “player versus player” (PVP) scenario. This also explains why market rebounds are short-lived and why market breadth narrows, even as total assets under management (AUM) remain stable. The current volatility peaks are mainly driven by liquidation cascades rather than sustained trend formation.

Looking ahead, any significant revival in one of the liquidity channels—such as re-minting stablecoins, creating new ETFs, or increasing DAT issuance—would signal a macro liquidity return to the digital asset space. Until then, cryptocurrencies remain in a self-financing phase, with capital cycling internally without value appreciation or expansion.