A look at the role of narratives in crypto, how whales trade narratives and how to be early to one.
In the ever-evolving world of cryptocurrencies, narratives play a pivotal role in shaping the market landscape and influencing investor behavior.
By captivating the imagination of developers, traders and the community, narratives can lead to long-term change in the market. As such, an understanding of how narratives are shaped, propagated and acted upon help savvy investors secure a strong position for themselves.
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What Are Cryptocurrency Market Narratives?
As a relatively nascent industry, the cryptocurrency market remains driven by so-called “narratives,” which are underlying reasons or catalysts behind how the market moves and reacts over time.
There could be multiple market narratives operating at once, and the broad response to these narratives by traders, institutions and regulators leads to changes in the supply and demand mechanics of the various different cryptocurrency assets.
Narratives can be negative or positive, with negative narratives often leading to price suppression and a general market sell-off, while positive narratives can lead to accumulation and growth.
Market narratives don’t just impact the day-to-day value and trading volume of related cryptocurrencies, but also their long-term prospects. This, because particularly positive or negative narratives can change developer interest and early-stage funding in the cryptocurrency space.
Narratives can be long-standing and pervasive, or remarkably short-term, fizzling out in just days or weeks. Besides the virality of the general theme, several external factors can impact how pervasive and long-lasting a narrative is — including regulatory pressure, technological development, media coverage and potential impact.
How Do Narratives Form?
Different narratives can form in the cryptocurrency market based on a variety of factors, including market sentiment, news and events, investor behavior, and the underlying technology of different cryptocurrencies.
Narratives in the Previous Bull Market
Some of the most prominent narratives of the previous cycle include:
In the previous bull market, hundreds of projects launched and promised to use blockchain technology to better reward users through revenue sharing and emission-based incentive models.
Broadly described as “X-to-Earn,” these projects leveraged a variety of token-based reward mechanisms to drive growth, retain users and incentivize stakeholders.
In the previous cycle, a huge amount of hype developed around the metaverse — an interconnected landscape of virtual worlds and platforms that players could cohabit, explore, co-create, and in some cases, monetize.
In October 2021, Facebook rebranded to Meta as part of a push to become a leader in the development of the metaverse. Just a month later, Microsoft acquired AltspaceVR in a bid to gain a foothold in the booming metaverse market.
However, many metaverse platforms remain limited in their usability and capabilities, resulting in low user engagement — a challenge that remains today.
These narratives currently include:
Thanks to the massive success of OpenAI’s ChatGPT and related large language models (LLMs), interest surrounding the capabilities of artificial intelligence has skyrocketed in recent months.
It also fueled the dramatic expansion of the blockchain/AI sector, with dozens of projects now exploring the intersection of the two technologies. Some of the most recent include ChainGPT, LayerAI, and BitTensor.
In under a month, Pepe evolved from an obscure meme coin to a top 40 cryptocurrency with an all-time high (ATH) market cap of $1.6 billion — and listings on several prominent exchange platforms. The market cap currently stands around $500M.
Driven by a sizable community, general hysteria and irrational exuberance, Pepe became the fastest-growing meme coin of all time and catalyzed renewed interest in community coins and tokens with little-to-no utility.
In the last three months, hundreds of meme coins have launched, most of which were crafted in absurdity and quickly fell into obscurity. A tiny fraction, however, managed to generate momentum.
Liquid Staking Derivatives (LSDs)
Liquid staking derivatives (LSDs) began to explode in popularity in early 2021, as people began to explore ways to maximize the capital efficiency of their staked ETH on the beacon chain, which could not be withdrawn then.
Liquid Staking platforms provide users with LSD tokens by staking their ETH tokens with the associated protocol. These tokens represent their share of the supply staked with the protocol and can be in DeFi — such as lending, trading and yield farming.
How To Identify Narratives Early
When it comes to trading narratives, being early is paramount. Today, there are several platforms that allow users to easily spot and track high-performing wallets, such as those associated with VC funds, individual whales and well-known traders — these are generally known as “smart money trackers” or some derivation.
These platforms can reveal traders that move early on narratives and manage to capitalize on them. They can also be used to gauge when a narrative might be running out of steam — signaling an early opportunity to exit related positions.
Click here for a more detailed look at how you might get started spotting emerging crypto unicorns.
Another important factor is to seek to identify the underlying narratives that drive how the market evolves and partially determine the assets that perform well.
Those familiar with general macroeconomic theory may have heard, "A rising tide lifts all boats.” Applied to the blockchain space, this means a strong narrative lifts all (or most) of the projects that fit within it.
Because of this, investors can use the prevailing narrative to narrow down potentially undervalued projects or even spot the next crypto unicorn.
Narratives can form in different ways and some are clearer than others. Because of this, it’s important to have a broad understanding of the cryptocurrency market, the technology sector, and current macroeconomic events to help you more easily identify emerging themes that others might miss.
Nonetheless, there are some simple tips you can use to give you a better chance of spotting narratives early. These include:
How Do Whales Trade Narratives?
The ability to spot a current or emerging narrative is only part of the challenge traders are faced with. What to do when a narrative has been identified is arguably even more tricky.
Generally, successful narrative traders will use some variation of the strategy outlined below to maximize their profitability and manage their risks.
Step 1: Predicting Narratives
The first step involves predicting emerging narratives.
Some VCs and institutional investors are noted for capturing narratives early. Such as the venture arm of Animoca Brands, which was one of the first VCs to capitalize on the Play-to-Earn narrative, or Binance Labs, which invested in many of today’s most prominent layer-1 projects in their early funding rounds.
This requires staying informed about technological advancements, societal trends and changes in investor sentiment.
Step 2: Research and Analysis
Once a potential narrative is identified, it's crucial to perform comprehensive research and analysis.
This might involve identifying high-potential projects related to the narrative and understanding their key features to assess whether they stand a chance at achieving growth.
Step 3: Managing Risk
Once promising projects have been identified, it’s then important to evaluate their short and long-term potential, their risk factors, and how they fit into the overall trading portfolio.
Risk management strategies such as diversification, stop losses, and careful position sizing should be employed to minimize risk.
Step 4: Entering Positions and Maximizing Yields
After assessing potential and risk, traders should strategically enter positions to maximize yields. This could involve laddering buys to get a good average entry price or timing purchases to coincide with market trends.
The savviest investors will typically look to maximize their yields where possible, using a combination of the numerous DeFi and CeFi platforms to earn a further return on their assets — such as through staking or liquidity provision.
Step 5: Defining and Applying the Exit Strategy
A well-defined exit strategy is critical. This might involve setting price targets, using trailing stop losses, or planning to hold until certain project milestones are reached.
As narratives evolve, traders should be ready to adjust their exit strategy, always ensuring it aligns with the overall risk tolerance and investment goals. Most traders will use a combination of automatic alerts and manual reviews to keep their positions in check.