In 1979, Republic National Bank offered its customers a choice. Deposit $1,475 for 3.5 years and receive a 17-inch color TV; or deposit the same amount for 5.5 years and receive a 25-inch TV. Want an even better deal? Deposit $950 for 5.5 years and receive a sound system with built-in disco lights.
During the Great Depression, banks competed for deposits by relying on regulations that prevented them from offering competitive interest rates. Regulation Q of the Banking Act of 1933 prohibited banks from paying interest on demand deposits and capped interest rates on savings accounts. Although money market funds offered higher yields, banks were offering toasters and TVs instead of actual returns. The banking industry referred to investors in money market funds as "smart money" and their own depositors as "dumb money," arguing they didn't understand they could get higher returns elsewhere. Wall Street enthusiastically adopted this language, using it to describe investors who appeared to buy high and sell low, chase trends, and make emotional decisions. Fifty years later, these "dumb money" are having the last laugh. The concept of "dumb money" is deeply ingrained in Wall Street psychology. Professional investors, hedge fund managers, and institutional traders have built their identities around the "smart money"—the savvy players who can see through the market noise and make rational decisions, while retail investors make poor decisions in a panic. When retail investors do exhibit this behavior, this narrative works well. During the dot-com bubble, day traders mortgaged their homes to buy tech stocks at their peak. During the 2008 financial crisis, individual investors fled the market at its bottom, missing out on the entire recovery. The pattern is this: professionals buy low and sell high, while retail investors do the opposite. Academic research confirms this bias. Professional fund managers cite these patterns as evidence of their superior skills and justification for their fees. What changed? Access to information, education, and tools. The New Retail Reality Today's data tells a very different story. In April 2025, US President Trump announced tariffs, triggering a $6 trillion market sell-off in two days. Professional investors sold stocks, while retail traders saw an opportunity to buy. During the market turmoil, individual investors snapped up stocks at a record pace, pouring a net $50 billion into the U.S. stock market since April 8th and earning a return of about 15%. During this period, Bank of America's retail clients bought stocks for 22 consecutive weeks, the firm's longest streak since 2008. Meanwhile, hedge funds and systematic trading strategies, with equity exposure, fell in the bottom 12 percentage points and missed out on the entire rebound. The same pattern played out during the market volatility of 2024. JPMorgan Chase data shows that retail investors drove most of the gains in late April, with individual investors' market share reaching 36% between April 28th and 29th—the highest level on record. Robinhood's Steve Quirk captured this shift: "Every IPO we've participated in has been oversubscribed. Demand always outstrips supply. Issuers like that and want the fans who support their company to get their allocations." In the cryptocurrency space, retail investor behavior has evolved from a typical "buy high, sell low" model to sophisticated market timing. According to JPMorgan Chase, 17% of active checking account holders moved funds into cryptocurrency accounts between 2017 and May 2025, with participation surging during strategic moments rather than peak sentiment. The data shows that retail investors are increasingly exhibiting "buy the dip" behavior, with participation notably increasing during Bitcoin's all-time highs in March and November 2024—though notably, when Bitcoin reached its higher peak in May 2025, retail participation remained restrained rather than frenzied. This suggests learning and restraint, rather than the fear of missing out (FOMO)-driven behavior traditionally associated with retail cryptocurrency investors. The median amount invested in cryptocurrencies remains low, less than one week's earnings, suggesting prudent risk management rather than excessive speculation. Industries like gambling, sports betting, and memecoins prove there’s still a “steady supply of dumb money.” But the data suggests otherwise. Casinos and sports betting platforms do generate billions of dollars in transaction volume, with the online gambling market valued at $78.66 billion in 2024 and projected to reach $153.57 billion by 2030. In the crypto-memecoin space, periodic speculative frenzy leaves latecomers holding worthless tokens. Even in this realm of so-called "dumb money," behavior is becoming increasingly savvy. Despite generating $750 million in revenue from memecoin creation, Pump.fun saw its market share plummet from 88% to 12% when competitors offered better communication and transparency. Retail users aren't blindly continuing to support incumbent platforms—they're switching to those that offer a better value proposition. The memecoin phenomenon isn't a testament to the foolishness of retail investors; rather, it demonstrates their rejection of venture capital (VC)-backed token offerings that deny them fair access. As one cryptocurrency analyst notes, "memecoins give token holders a sense of belonging and foster connections based on shared values and culture"—they are social and financial statements, not just speculation. The IPO Revolution The growing influence of retail investors is most evident in the IPO market. Companies are abandoning the traditional model of catering only to institutional investors and high-net-worth individuals. Bullish represents a watershed moment in how companies approach IPO allocations. Founded by Block.one and backed by major investors including Peter Thiel's Founders Fund, Bullish operates as both a cryptocurrency exchange and an institutional trading platform. When the crypto company went public at a $1.1 billion valuation, it opened subscriptions directly to retail investors through platforms like Robinhood and SoFi. Retail demand was so strong that Bullish priced its shares at $37 per share, nearly 20% above the top of its initial price range. The stock soared 143% on its first day of trading. Bullish sold one-fifth of its shares—worth approximately $220 million, roughly four times what industry veterans consider normal—to individual investors. Moomoo's clients alone placed orders exceeding $225 million. This wasn't an isolated incident. The Winklevoss twins' Gemini Space Station explicitly allocated 10% of its shares to retail investors. Figure Technology Solutions and Via Transportation also IPOed through retail platforms. The shift reflects a fundamental change in how companies view retail investors. As Jefferies' Becky Steinthal explains: "Issuers can choose to allow retail investors to take a much larger share of the IPO process than before. It's all driven by technology." Robinhood data shows that demand for IPOs on its platform will be five times higher in 2024 than in 2023. The platform now has a policy prohibiting selling shares within 30 days of an IPO, creating a more stable buy-and-hold behavior that benefits both companies and long-term shareholders. This shift is reflected not only in individual investment decisions but also in structural market changes. Retail investors now account for approximately 19.5% of US stock trading volume, up from 17% a year ago and well above the pre-pandemic level of approximately 10%. More importantly, retail investor behavior has fundamentally changed. In 2024, only 5% of Vanguard 401k investors adjusted their portfolios. Target-date funds now hold over $4 trillion in assets. This suggests investors are placing more trust in systematic, professionally managed investment solutions rather than frequent buying and selling. This shift leads to a better retirement by avoiding costly, emotion-driven trading mistakes. eToro data shows that 74% of its users were profitable in 2024, with the profit rate rising to 80% for premium members. This performance contradicts the basic assumption that retail investors consistently lose to professional managers. Demographics support this shift. Younger investors enter the market earlier—Gen Z began investing at an average age of 19, compared to 32 for Gen X and 35 for Baby Boomers. They have access to educational resources that previous generations lacked: podcasts, newsletters, social media influencers, and zero-commission trading platforms. The popularity of cryptocurrency best reflects the growing sophistication of retail investors. Although institutional investors have shown limited interest in Bitcoin, ETFs, and corporate bonds, actual cryptocurrency usage is primarily driven by retail investors. According to Chainalysis, India leads global cryptocurrency adoption, followed by the United States and Pakistan. These rankings reflect grassroots usage across centralized and decentralized services, not institutional accumulation. The stablecoin market is dominated by retail payments and remittances, with USDT alone expected to process over $1 trillion in monthly transactions in 2024. USDC's monthly trading volume ranges from $1.24 trillion to $3.29 trillion. These are not flows managed by institutional funds—they represent millions of individual transactions for payments, savings, and cross-border transfers. When cryptocurrency adoption is broken down by World Bank income brackets, adoption peaks simultaneously among high-income, upper-middle-income, and lower-middle-income groups. This suggests that the current wave of adoption is broad-based, rather than concentrated among wealthy early adopters. Bitcoin remains the primary fiat onramp, with over $4.6 trillion in exchange purchases between July 2024 and June 2025. However, retail investors are becoming increasingly savvy in diversifying their investments, with Layer 1 tokens, stablecoins, and altcoins all seeing significant inflows. The irony of the "smart money" versus "dumb money" debate is most clearly demonstrated by examining the recent behavior of institutional investors. Professional investors consistently misjudge major market trends, while retail investors demonstrate discipline and patience. During the institutional adoption phase of cryptocurrency, hedge funds and family offices made headlines for increasing Bitcoin investments near cycle highs. Meanwhile, retail investors accumulated during bear markets and held onto their holdings amidst volatility. The rise of crypto ETFs perfectly illustrates this point. More than half of crypto ETF investors did not previously hold cryptocurrencies directly, suggesting that traditional channels are expanding rather than cannibalizing the investor base. Among ETF holders, the median allocation remains around 3-5% of the portfolio, indicating prudent risk management rather than excessive speculation. The recent behavior of professional investors reflects the typical retail investor mistakes that they have long criticized. When the market is turbulent, institutional investors tend to flee the market to protect quarterly performance indicators, while retail investors buy on dips to build long-term accounts. Technology is the Great Equalizer This shift in retail investor behavior is no accident. Technology has democratized access to information, tools, and markets once the exclusive domain of professionals. Robinhood's innovation extends beyond commission-free trading. They've launched tokenized US stocks and ETFs for European users, enabled staking on Ethereum and Solana in the US, and are building a copy-trading platform that allows retail users to follow top-proven traders. Coinbase has expanded its consumer crypto offerings with an improved mobile wallet, prediction markets, and simplified staking. Stripe, Mastercard, and Visa have all launched stablecoin payment features, making cryptocurrencies spendable at thousands of retailers. Wall Street's recognition of retail influence creates a feedback loop that further empowers individual investors. When companies like Bullish achieve success with a retail-focused IPO strategy, others tend to follow suit. Jefferies research identifies stocks with high retail trading volume and low institutional interest as potential opportunities, including Reddit, SoFi Technologies, Tesla, and Palantir. The research indicates that "as retail investors comprise a larger share of trading, quality in traditional metrics becomes less important"—but this likely reflects different evaluation criteria among retail investors rather than poor decision-making. The crypto industry's evolution toward retail accessibility illustrates this dynamic. Today, platforms compete not just on institutional relationships but on user experience. Features like convenient perpetual trading, tokenized stocks, and integrated payments are all aimed at mass retail participation. The "dumb money" narrative persists in part because it serves the economic interests of professional investors. Fund managers justify fees by claiming superior skills. Investment banks maintain pricing power by restricting access to highly profitable trades. Data suggests these advantages are eroding. Retail investors are increasingly demonstrating the discipline, patience, and keen market timing that professionals claim are unique. Meanwhile, institutional investors often exhibit the emotional, trend-following behavior they have long attributed to retail investors. This doesn't mean every retail investor makes optimal decisions. Speculation, abuse of leverage, and trend chasing remain common. The difference is that these behaviors are no longer unique to "retail investors"—they exist among all investor types. This shift has structural implications. As retail investors gain greater influence in IPOs, they are likely to demand better terms, more transparency, and fairer access. Companies that embrace this shift will benefit from lower customer acquisition costs and a more loyal shareholder base. In the crypto space, the dominance of retail investors means that products and protocols must prioritize usability over institutional features. The successful platforms will be those that make complex financial services accessible to ordinary users. There's an uncomfortable truth behind the recent success of retail investors that deserves acknowledgment: Over the past five years, nearly all assets have risen. The S&P 500 rose 18.40% in 2020, 28.71% in 2021, 26.29% in 2023, and 25.02% in 2024, with only a notable decline in 2022, down -18.11%. Even 2025 is up 11.74% year-to-date. Bitcoin rose from approximately $5,000 at the beginning of 2020 to a peak near $70,000 in 2021, maintaining an overall upward trend despite continued volatility. Even traditional assets like Treasury bonds and real estate saw significant gains during this period. In an environment where "buy the dip" strategies consistently work and nearly any asset can generate positive returns if held for more than a year, it's difficult to distinguish between skill and luck. This raises an important question: Can retail investors' seemingly sophisticated skills survive a true bear market? The longest major decline experienced by most Gen Z and Millennial investors was the COVID-19 shock, which lasted just 33 days. The 2022 inflation scare, while painful, was followed by a swift recovery. Warren Buffett's famous saying, "Only when the tide goes out do you discover who's been swimming naked," holds true here. Perhaps retail investors are indeed smarter, more disciplined, and better informed than previous generations. Or perhaps they are simply the beneficiaries of an unprecedented bull run across nearly every asset class. The true test will come when easy monetary conditions end and investors face sustained portfolio losses. Only then will we know whether the shift away from "dumb money" is permanent or simply a product of favorable market conditions.
This concludes today’s in-depth discussion. See you in the next article.
Jixu
Davin
Joy
Brian
Hui Xin