Dragonfly: Retail investors exit, institutions provide a backstop; cryptocurrency volatility may be hard to outpace US stocks

Source: “Miles Deutscher Finance” Podcast; Translation: Felix, PANews

Dragonfly partner Haseeb recently shared his current views on the crypto space in the “Miles Deutscher Finance” podcast, analyzing in depth the whereabouts of retail investors, why institutional investors dominate, the true face of Bitcoin, quantum risks, and more. Additionally, Haseeb explained why AI agents could completely change how people use cryptocurrencies and why this might trigger the next wave of on-chain applications. PANews has summarized the highlights of the conversation.

Host: Since the Iran incident, the market seems to be pushing higher, and now the stock market is also at a historic high. How do you interpret the current market?

Haseeb: The market seems to have stabilized. Since October last year, what you’ve seen is a complete loss of retail investors. If you ask exchange founders, they will tell you that almost no retail activity remains—only a small fraction from the frenzy of 2020/2021. Retail investors are fickle. If you look at core indicators like search volume, trading volume on retail-focused exchanges, app store downloads, etc., it’s clear retail attention has left the building.

So who is supporting the market? The answer is institutions. If you observe the overall situation of Bitcoin ETFs, as the entire market declines, Bitcoin ETF prices have fallen about 7%, but the total funds withdrawn from ETFs are much smaller, indicating that institutions are still here. They form the market’s bottom line. At this moment, they are the last buyers. Institutions also act as shock absorbers for volatility, which is why Bitcoin hasn’t plummeted 70% to 80% like in previous cycles. Therefore, the total size of ETFs suggests that “smart money” generally believes this space won’t disappear, but retail investors have indeed left.

When retail investors leave, the crypto market loses more than half of its participants. Even for crypto ETFs, retail investors are a significant part of Bitcoin ETF demand. But those remaining are not the speculative fast-money traders; those people are gone. Now, to understand the market, you need to answer two questions: Why did they leave? When will they return?

First, why did they leave? Because they lost a lot of money. The vast majority of market crashes are borne by retail investors. Retailers are forced to liquidate high-leverage positions (ADL), and they also hold those plummeting altcoins. Institutions don’t typically use leverage to long assets like Atom. While some market makers and liquidity funds lost money, it’s nowhere near as severe as retail losses. Second, the crypto market is reflexive. It heavily depends on momentum. When momentum turns negative, it stays negative, and prices keep falling until some positive catalyst pulls them back.

Retail investors didn’t just leave—they shifted to gold, they started trading AI stocks, oil, and other assets. They chase assets with even higher volatility than cryptocurrencies—gold’s volatility can surpass Bitcoin’s. Crypto is no longer the “most exciting show on TV” right now. The main reason retail was attracted to crypto was its extreme craziness and high volatility. If crypto becomes a low-volatility asset, its appeal to retail investors will diminish significantly.

To some extent, since no asset can only fall and never rise, and still make people happy, no one wants to trade an asset that’s constantly declining. So, cryptocurrencies need to start rising again, which is one of the prerequisites for regaining retail attention. We’re beginning to see signs of this because the crypto market seems to have bottomed out. Of course, no one can predict future trends—geopolitics is a major factor influencing all asset classes.

The second point is that current AI is highly volatile. We see this in gold and commodities as well; their volatility is extremely exaggerated now. The US and Iran are gradually easing tensions. If you look at predictions on Polymarket, the market believes the likelihood of ongoing war by the end of this year is very low, and the chance of reaching a comprehensive peace agreement by late summer exceeds 50%. Therefore, we are likely to see commodity prices stabilize and macroeconomic conditions become more stable. But the stock market may remain volatile for a while, especially if we see major IPOs this year. If Anthropic or OpenAI go public before year-end, retail investors will finally have a chance to buy them, and these stocks could trigger wild swings. Same with xAI, SpaceX—these are narratives with extremely high volatility that retail investors love to chase.

Host: So what’s your outlook for the rest of this year? How do you see the market evolving? We just discussed some volatility in the US stock market. It sounds like you think US stocks will be more volatile this year.

Haseeb: Yes, I believe that before next year, crypto volatility will not surpass that of US stocks. My guess is that the crypto market will gradually recover as it is now. But I think the key will be after these big tech IPOs next year. I believe then the crypto market is more likely to see a broader recovery, possibly challenging new all-time highs. Of course, these are all guesses—I don’t have a crystal ball. But a clear logic is: cryptocurrencies need to reclaim the title of volatility king to be more attractive to retail investors. If they can’t win back retail buying, relying solely on institutional funds won’t push the market to new highs. People are excited about institutional capital, and I agree it’s important, but it will mostly flow into crypto equity firms rather than Bitcoin, Ethereum, Solana, or altcoins. To make the broader crypto ecosystem perform well, retail investors need to come back. And to do that, crypto must be attractive compared to US stocks.

Host: What narrative do you think can bring retail investors back? Specifically, what’s the narrative around Bitcoin? Do you see any catalysts that could trigger this? Obviously, price increases create narratives, but there need to be other factors because I feel Bitcoin has lost some faith. I still believe in it personally—you can definitely see it as digital gold—but with the recent strong performance of gold and US stocks, plus threats from quantum computing and other factors mentioned in the news, some faith has indeed been lost. Are you still a Bitcoin believer? Do you think it has a clear path as an asset?

Haseeb: I think people overestimate the “narrative” part that Bitcoin needs. Honestly, I don’t think Bitcoin has that many narratives. People just believe Bitcoin will exist forever; it won’t disappear. They see Wall Street’s increasing acceptance—Bitcoin ETFs, though just launched, are already among the most actively traded ETFs globally. Bitcoin has huge demand. If you ask “what’s the narrative?” I don’t see anything particularly special—it’s just expected to keep growing over the next 15 to 20 years. As the Baby Boomer generation ages and hands over capital decision-making to Gen X and Millennials, they will find Bitcoin right there. They will accept it directly, see it as part of the world, a financial asset that won’t vanish. So I don’t know if anything specific will happen in the next two years; I think it’s just a gradual solidification into a more stable, better-understood financial asset.

However, quantum computing is a real risk, especially within the next 3 to 5 years. To reassure people about Bitcoin, you need a clear Bitcoin Improvement Proposal (BIP), community consensus around it, and a migration plan. Once you see that migration plan, confidence in Bitcoin increases. When the migration is complete, the quantum threat is essentially in the past. I am quite confident this will happen; you can already see the Bitcoin community starting to address quantum issues. Ultimately, quantum computing will be like the “Y2K” crisis.

(PANews note: The most famous global tech crisis event in the late 20th century. On the night of December 31, 1999, to January 1, 2000, many old computer systems and software worldwide might malfunction, crash, or produce errors due to the inability to handle the “00” year. It was ultimately resolved without large-scale disaster.)

Quantum computing is indeed a risk; someday someone will develop a quantum computer capable of cracking ECDSA (Elliptic Curve Digital Signature Algorithm). But afterward, the question is: have the blockchains migrated? If they have, then it’s no big news. It becomes like Y2K. People say, “Oh, this could be a terrible thing,” but “we’re prepared, we’ve migrated, we know how to fix this bug,” and then the vulnerability is patched, the crisis ends, and no one talks about it anymore. That’s how the quantum threat will ultimately be resolved. So looking back, we will treat the quantum crisis like the Bitcoin block size debate—something that happened in the past, and no one will bring up again. Future generations will look back and find it hard to believe it was ever such a big issue, because in their view, it was never really a problem.

Host: Yes. You mentioned in a previous podcast that exchanges could even block addresses, with mechanisms to prevent compromised supply from entering the market. But you also pointed out that even if it does impact the market, it will be priced in advance, and could instead serve as a bullish catalyst.

Haseeb: Exactly. Suppose next year the Bitcoin community agrees on a new signature scheme standard, giving everyone three or four years to migrate keys. After that deadline, old addresses become invalid, and tokens are burned. Then all institutions and most users will have completed migration. If five years later quantum computers are actually developed, it would be a net positive for Bitcoin: first, because quantum computers won’t be invented before the full migration; second, because a large amount of un-migrated supply would be burned. In many cases, the quantum migration will end up being a bullish catalyst.

Host: That’s Bitcoin’s situation. But what about altcoins and other crypto assets? Retail interest remains low. What’s your overall assessment of this market?

Haseeb: The beauty of the market is that it’s relative. Altcoins have fallen a lot, but they can also rebound significantly. You don’t need everyone in the world to refocus on crypto for altcoins to rise 30%, 40%, 50%, or even 100% from the lows we’ve touched. So if we see a broader macro recovery in crypto, I believe many projects have substantial room to rebound.

That said, I think retail interest will take some time to return. Retailers are more driven by narratives in altcoins. Unlike Bitcoin, altcoins are not guaranteed to succeed over the long term. For Ethereum, Solana, and all other projects, you really need to tell a story about why they matter; because unless you’re like Hyperliquid, which can print tokens, generate revenue, and buy back and burn, most other cryptocurrencies lack strong fundamentals. If you look at revenue-generating tokens like Hyperliquid, they make up a tiny fraction of the market; most trading is based on expectations of the future. So when talking about future prospects, you need a story about what will happen, and that story must be credible to retail investors. I believe this is definitely feasible. We have all the raw ingredients for success. But people need to be excited about the future of crypto. I think the core of crypto has already proven its resilience and that more influential people believe in it. Look at Kevin Waugh’s congressional testimony, where he basically said: “Yes, I believe cryptocurrencies are now deeply embedded in finance and won’t disappear; they are very valuable to US interests.” You can’t imagine Yellen or Powell saying that. We are now in a different world—Federal Reserve Chairmen are saying such things, and they will be in office for a long time. So I think there has been a tectonic shift among financial institutions embracing crypto. Reports say Meta will launch its own crypto wallet later this year. All of this points to one thing: crypto is here to stay. But you need some concrete narratives to truly bring retail back.

Host: You mentioned in a tweet that financial-attribute cryptocurrencies are exploding, which is one of your major points this year. You also talked about the decline of non-financial crypto assets. I’d love to hear your arguments on this, and why you see it as such a huge opportunity. I also looked into Dragonfly’s investments. Clearly, you’ve bet heavily on this direction.

Haseeb: I’ve always believed that fundamentally, crypto is about money and finance. All the large-scale successful projects—Bitcoin (digital gold), Ethereum (financial smart contracts), DeFi, ICOs, RWAs, stablecoins, prediction markets—are related to money and finance. The stories about crypto being used for supply chain tracking, the metaverse, gaming, social media are mainly VC and industry self-indulgent meta-narratives, even Zuckerberg fell into that trap. At the time, many VCs invested in Yuga Labs, Axie Infinity, OpenSea, etc., but we didn’t participate because those games weren’t fun, and decentralized social wasn’t useful. It proved I was right—the real product-market fit for crypto is money and finance. That’s why, over many years, we’ve continued investing in DeFi, stablecoins, exchanges, and other core areas; and why, even as many misguided VCs have been eliminated, we still have the power to invest in this space.

Host: So in the financial crypto space, what are you currently looking at? Prediction markets or AI agents?

Haseeb: Both. We are major investors in Polymarket. Recently, Polymarket announced it will launch perpetual contracts because for scalar predictions (like valuations), existing binary options greatly disperse liquidity and are inefficient; retail investors mainly want to buy assets that can go up or down. That’s the main reason they’re launching Perp. On the other hand, the intersection of AI and crypto is where I spend a lot of my time, especially “agent payments.” We’ve looked at many API gateway projects that allow AI agents to perform tasks via APIs—paying for computation, solving CAPTCHAs, web searches—using crypto and stablecoins on demand, without needing to register accounts.

Host: You mentioned on Twitter that “cryptocurrency isn’t designed for humans, but for AI agents.” How do you see this evolution?

Haseeb: Almost all software interactions will change. AI agents will be your first interface with software. The current user experience of crypto is terrible; it’s not how humans want to interact. Why remember 12-word private keys? Why use currencies with 15 decimal places? Why look at incomprehensible smart contracts? But for machines, all this is perfect. Machines understand APIs, will never leak keys in plaintext. 15 decimal places don’t matter to AI. Humans can’t read Solidity code, but AI is essentially a crazy programmer—it can parse and understand smart contracts in half a second, knowing exactly what it’s signing. For example, during a hacking attack, humans still need to see notifications on their phones and manually operate to withdraw funds, but your AI agent can monitor positions and mempools in the background instantly. Even before cross-chain hacker funds, it can quickly move your assets back to a safe address. With enough computing power, top-tier cybersecurity models will be available for everyone. When all this happens, with AI involved, crypto will become as safe and robust as traditional finance. Why trust banks? Because banks have systems to ensure you don’t accidentally send money to North Korea. In crypto, no one stops you, but in the future, AI will serve as that intelligent filter, doing the same.

Host: Does this open the door for billions of people and AI agents to adopt crypto? Do you see this as a major industry turning point?

Haseeb: Absolutely. But it won’t happen overnight because current AI agents aren’t smart enough—they hallucinate and make spelling errors. But it’s like the development of AI coding tools: it will quickly evolve from uncontrolled “wild horses” to a safe “airplane” that won’t crash. Once models mature and are trained on-chain, the public’s perception of crypto risks will be thoroughly overturned.

Host: In that world, who benefits the most? Bitcoin? L1s? Or DeFi?

Haseeb: If massive groups come to on-chain crypto because AI agents make it safe, they will definitely buy trusted mainstream assets like Bitcoin. Some might think Hyperliquid (leverage trading app) will benefit, but I believe it’s on the wrong side. New entrants aren’t here to gamble. People wanting to gamble are already gambling. You wouldn’t tell your AI agent, “Go trade leverage for me,” like sending a friend to gamble at a casino—stupid and no fun.

Host: But what if you think your agent is better than others? Wouldn’t that turn into a financial war between agents? Also, with fiat onramps lowering barriers, will ordinary people find it easier to participate in applications?

Haseeb: First, platforms like Hyperliquid and Polymarket already have fiat onramps; many users don’t even realize they’re using crypto wallets. Friction in deposits and withdrawals isn’t the main barrier to trading. The real factor is risk appetite. High-risk-tolerant people have long been on-chain. The ones who can bring 10x explosive growth are the risk-averse ordinary users. Currently, they participate very little. When markets become fully safe via AI, they will flood in. What will they do? They will buy stablecoins, real-world assets (RWAs), like tokenized S&P 500. Currently, “savings” and “passive investing” are almost nonexistent on-chain. Once long-term passive index investing matures on-chain, this ecosystem will experience a complete explosion.