Why does the stock market keep reaching new highs while the crypto market remains sluggish?

Author: Blockchain Knight; Source: X, @Knight_in_Block

If you are simultaneously watching the traditional U.S. stock market and the crypto market, the performance over the past half year will surely give you a strong sense of disconnection.

On one side, the U.S. stock market is riding the wave of artificial intelligence, repeatedly hitting new highs as if pulling up weeds in a drought; on the other side, the crypto market is struggling through continuous declines, even when there are rebounds, they are quickly overwhelmed by selling pressure.

This tug-of-war game where traditional finance eats the meat and the crypto market drinks the northwest wind is intertwined with the impact of macro liquidity and the inherent flaws of the crypto ecosystem.

In the past six months, AI has become a global capital vacuum cleaner, draining the premium from the crypto market. In the past, blockchain was a grand narrative where adventurers bet on future technology, but in these six months, the AI ecosystem has experienced a real industry explosion.

Capital is extremely pragmatic. The AI giants in the U.S. stock market not only have endless stories to tell but also support them with late-night chip orders and black-and-white financial reports showing profits.

In contrast, the crypto market has fallen into a narrative vacuum over the past half year. The high-performance public chains hyped in the last cycle now look more like ghost towns with no visitors. When AI demonstrates a dimensionality reduction-like ability to attract funds, a large amount of risk capital originally belonging to the crypto circle hurriedly packs up and shifts to the tech stocks.

Secondly, the Federal Reserve’s strategy has become a Damocles sword hanging over crypto assets. Although the market is always expecting interest rate cuts, macro data over the past six months has made the Fed’s steps unusually cautious. Therefore, under the backdrop of sustained high interest rates, global risk appetite is shifting.

Large-cap tech stocks are like safe havens with built-in heating functions, able to withstand the winter of high interest through strong cash flows and stock buybacks. Meanwhile, the crypto market is purely a liquidity barometer. Without cheap and abundant funds irrigating it, this dried-up soil cannot nurture a market of widespread gains.

More critically, the high FDV (Fully Diluted Valuation) and unlimited unlocking of tokens in the crypto market pose a crisis, which has been the internal cause of the collapse of many copycat projects over the past six months.

In recent years, a large number of high-valued, low-circulation projects driven by VC funding have finally reached their unlocking phases.

With external incremental funds entering the market sluggishly, the existing funds are ruthlessly diluted by continuously unlocked tokens, trapping the market in a vicious cycle of bleeding without self-sustenance.

Additionally, the legalization of spot ETFs has somewhat domesticated Bitcoin, but it has also stripped away its flexibility. When Wall Street’s old money becomes the largest price setter for Bitcoin, it increasingly resembles a traditional macro allocation tool.

In this half-year of strong profit effects in the U.S. stock market, many old crypto investors and long-term holders chose to take profits at high levels and reallocate to stocks. This flow of funds from east to west has caused the crypto market to lose upward momentum.

Of course, you might be curious—when can this situation improve?

Given the current situation, there is no sign of sustained upward momentum for the crypto market in the near future. The exhaustion of narratives, capital withdrawal, and macroeconomic pressures—these mountains before us will continue to exist, and all we can do is wait.

Just like Siddhartha said, “Waiting, thinking, fasting”—perhaps this is the best remedy for the cold winter.