Crypto Market Narratives and How to Find Them

Hello Investors,

Last week we covered the crypto market cycles and you voted to proceed with the Altcoin evaluation.

However, I realized we missed one part in between - crypto narratives and sector investing.

Let me add that missing piece this week before we jump into individual projects, and continue with the altcoin evaluation next week.

Let’s dive in.

Market Narratives

Market narratives are the stories investors follow with their money.

These stories can emerge from a variety of sources, including economic data, geopolitical events, technological innovations, or even social trends.

Most recently we can experience the impact of the AI narrative, which started with OpenAI’s ChatGPT release on November 30, 2022.

This release showed the wide public how AI can exponentially increase our productivity and make our lives easier in numerous ways.

And the result?

Influencers drive our attention to this area with narrative-focused content, new companies and startups emerge to monetize it with their tools, and AI-related stocks soar to record highs.

The Power of Narratives

Why are narratives so impactful?

A.) Emotion Over Logic: Humans, by nature, are story-driven. A compelling narrative can overpower analytical thinking, leading investors to make decisions based on the emotional weight of a story rather than empirical data.

B.) Simplifying Complexity: The financial market is complicated. Narratives help break down complex details into digestible stories, guiding investors in making sense of market happenings.

C.) Fear of Missing Out (FOMO): Stories of overnight millionaires and successful ventures can prompt herd behavior, with investors jumping onto the bandwagon, fearing they might miss out on the next big thing.

This is empowered by the influencers and raising market prices seemingly confirming the story is the next big thing.

Past Narratives

We have seen many significant narratives in recent years, such as The dot-com era where anything with internet in the description guaranteed a ‘success’ (read stock price will soar).

Another example was the housing market before the financial crisis in 2008 where investors believed the housing market would go up only, leading to overleveraged mortgages and investments in real estate.

Or more recent: the covid-driven tech era, ESG investing, EVs, anti-obesity, or cryptocurrencies.

While nothing goes up forever, these narratives are important for every investor as they can be leveraged to increase our returns.

Like it or not, if everyone is investing in AI, these stocks will go up no matter how overpriced they may seem.

They go up until they stop, and the bigger the narrative, the bigger the crash or bubble they create.

The winning strategy is to ride the narrative, but exit in time to realize the returns, instead of waiting for the market to crash and rotate to the next big thing.

Side note: It took Nasdaq 15 years to recover from the dot-com crash.

Crypto Narratives

Crypto itself is a narrative, and it follows the market cycles we discussed last week.

But inside each of these crypto bull cycles are smaller stories that investors follow.

Above is a great overview of the crypto narratives.

The big ones worth mentioning are:

1. The ICO bubble in 2017, where people raced to get some allocation in new shiny projects, no matter who was behind them or how feasible they were.

2. The DeFi Summer of 2020, which gave rise to DeFi protocols and platforms investors used to supercharge their returns.

3. And lastly, Gaming in 2021 where investing in pretty much any crypto gaming or metaverse project resulted in instant multiples.

Hindsight is always 20/20 and in retrospect, we can’t understand how could we not see it in time. But that’s the reality and while experiencing the event it’s very challenging to make the right investment decisions.

So how can we use the narratives?

Narratives and Sector Investing

We should consider current market sentiment when evaluating any investment, but what’s more, narratives go hand in hand with sector investing.

Sector investing is a top-down approach where we identify the most promising sectors, often following an upcoming narrative, and instead of trying to find a single winner, we spread the investment across broader spectrum of projects.

This results in potentially higher returns, but more importantly reducing the risk of choosing a wrong project.

How it works?

Option A - “Blue Chips”

If I want to invest in crypto AI, I can choose among the top few projects, where I have enough information to do proper due diligence and base my investment on tangible criteria.

This gives me a good chance that my investment will work out and I’ll enjoy nice returns.

These returns can be smaller because I’m in the high-cap (bigger projects) area.

Option B - Sector investing

I explore smaller projects, where the risk of the project going under or never delivering what it promised is exponentially higher, but so is the upside potential.

To mitigate the risk, I select a few projects in which I believe, and I invest a smaller amount in them.

This results in a more diversified portfolio with potentially higher returns, even if part of the portfolio doesn’t perform as expected.

My approach

I do both, choosing the winners in the spaces I understand and I feel confident, and where I don’t understand the sector well enough, I do more sector investing.

Whenever I enter smaller projects I always spread the risk among the sector.

The spread depends on individual investor and budget. It doesn’t make sense to make $100 investments in 50 different projects, but nor does it to invest $5,000 in one small-cap project and hope for the moon.

Current Crypto Narratives

There are many smaller narratives in the crypto space, but the bigger ones to explore are:

1. AI: The combination of AI and blockchain is getting attention and will attract a lot of investments from both traditional and crypto native investors.

2. Gaming: Gaming & Metaverse was popular in the last bull run, and real games are yet to be released.

3. Layer 2s / Modularity: Layer 2s are difficult to invest in with multiple ongoing airdrops, but modularity is something to keep an eye on and find the right entry point.

4. Liquid Staking / Restaking: Can be complex for beginners, need to calculate with gas fees.

5. Meme: Still not my cup of tea, but people like to gamble and speculate.

6. Bitcoin BRC-20 and L2s: We covered this in one blog. Unlocking BTC is an interesting concept, need to keep in mind that it’s already unlocked through wrapping.

7. Decentralized Physical Infrastructure Networks (DePIN): Consider how the tokens are created, many are highly inflationary or simply not needed.

8. Decentralized Social Networks: I didn’t find a good entry point, so I use it but don’t invest just yet.

9. Real World Assets (RWAs): A lot of this is happening behind closed doors, difficult to enter directly, worth exploring Web2 players.

If I were to start today, I would focus on infrastructure, expanding into AI and Gaming.

Then considering other narratives that are either close to my expertise or I believe there is a strong use case for blockchain and people will benefit from its capabilities.

Finding Different Narratives & Projects

A good starting point is CoinGecko or CoinMarketCap.

You can find all the categories and projects that belong to each.

Be careful, often projects are categorized into a sector that they are not focused on, just have some connection to it. So do your homework and explore the project before jumping in.

Interesting data on Dune.

When considering different narratives, think of:

A.) What people are most likely to buy (AI, games, things they understand).

B.) Prioritize areas you understand and can spot the difference.

C.) What you believe is the right use of blockchain/crypto.

Good luck!

Matt.