Key Takeaways
- Narratives are stories or beliefs that can heavily influence cryptocurrency prices, particularly over shorter timespans (i.e. multiple weeks or months).
- For some traders and investors, narratives are the entire basis of their decision-making. For others, narratives are of little to no relevance.
- The AI x Crypto narrative emerged on the back of global AI advancement. Several AI-focused cryptocurrencies surged in value.
- Potential future narratives: (1) Real World Assets (RWAs), (2) projects built on Bitcoin & (3) decentralised physical infrastructure (DePIN).
What Are Narratives?
The word ‘narrative’ is used heavily in the crypto space. Simply put, narratives are stories or beliefs that are capturing the market’s attention at a given time.
While narratives play a role in all markets, they are particularly influential in the crypto market. This is largely because there is not yet any clear consensus over how to value cryptocurrencies. (Compare this with stocks, for example, where metrics like earnings per share (EPS) and price-to-earnings (P/E) are often used for valuation purposes.)
Given how significantly narratives can drive cryptocurrency prices, some people choose to base their trading or investing style exclusively on narratives. In other words, their decision to buy or sell a cryptocurrency is entirely driven by their assessment of where the market’s attention is and where it is going.
One of Many Investing Styles
Ultimately, narrative-based investing is just one style of investing. It is generally suited to those who prefer trading or investing over shorter timespans, such as a few weeks or a couple of months.
Other styles of crypto investing give little to no consideration to narratives. For example, long-term crypto investors—whose time horizons typically span multiple years or decades—tend to base their decisions on the fundamentals of a given project, assessing factors such as tokenomics, the team, funding history and competition.
Is narrative investing the way to go? Only you can answer this question. It ultimately depends on your own circumstances and goals.
How Narratives Form
Explaining how narratives form is essentially like asking what drives market attention. Ultimately, narratives emerge for a wide range of reasons (e.g. cultural, technological, event-based).
For example, Elon Musk’s continued tweeting about Dogecoin (DOGE) in 2021 ignited a dog-themed memecoin narrative that lasted for months.
Another example, also from 2021, was when Facebook rebranded to Meta, introducing the concept of the metaverse to the masses. In the crypto market, this rebranding ignited a narrative whereby metaverse cryptocurrencies such as Decentraland (MANA) and The Sandbox (SAND) multiplied in price within a few weeks.
Facebook’s rebranding in Oct. 2021 sparked a weeks-long rally in metaverse tokens (Source: Meta)
An effective way to identify them is through social media and online communities. For crypto, the most relevant platforms to monitor attention are Twitter/X, Reddit, YouTube and Discord.
Assessing Narrative Strength
Spotting a narrative is one thing, but gauging its potential strength is much more challenging. As stated, some narratives will only last a week or so before evaporating, whereas others will survive for months on end. (Generally, the longer a narrative lasts, the more significant the returns are for the relevant tokens.)
Historically, the strongest crypto narratives are technologically driven. For example, in 2021, the dominant narrative of the year was ‘Ethereum competitors’. This arrived because the Ethereum blockchain was clearly struggling to deal with persistently high demand. This heightened activity caused transaction fees to soar to hundreds of dollars each.
During these times, users took to social media to complain about how ridiculously expensive it was to use Ethereum. Suddenly, Ethereum’s scaling issues were the centre of attention. Any narrative investor would have noted this dramatic change, considered the potential implications and assessed ways to invest in those implications.
Headlines like these were all too common in 2021, benefitting alternative L1s (Source: Business Insider)
One major implication was that Ethereum’s struggles opened the door for lower-cost competitors to steal market share and attention from Ethereum. This narrative of ‘alternative L1s’ or ‘Ethereum killers’ was one of the most powerful and longest-running narratives in the crypto market’s young history.
By staying under the spotlight for so long, it contributed to meteoric price growth for the likes of Terra (LUNA), Solana (SOL), Avalanche (AVAX) and BNB (BNB).
| Cryptocurrency | Return (2021) |
|---|---|
| Terra (LUNA) | +12,967% |
| Solana (SOL) | +11,114% |
| Avalanche (AVAX) | +3,335% |
| BNB (BNB) | +1,269% |
| Ethereum (ETH) | +399% |
Timing The ‘Narrative Top’
Like other aspects of narrative investing, knowing when a particular narrative is starting to weaken is more of an art than a science. This part is particularly tricky because there are many unexpected ways a narrative can start to fade.
Below are some factors worth considering when assessing whether a narrative still has room to run.
- Recent price performance: Has the narrative already caused the relevant cryptocurrencies to soar in price to valuations that feel unsustainable?
- Strength of the narrative: Is the narrative still a hot topic on social media, in online communities and on your favourite crypto podcasts? Or is something else now commanding the market’s attention? (Often, when a narrative is all everyone is talking about, the next narrative is already brewing.)
On the second point, dedicated narrative investors often pay for software services to track keywords and other quantitative data to help inform their decisions.
Potential Narratives in 2024
In 2023 and at the beginning of 2024, the AI x Crypto narrative emerged on the back of artificial intelligence adoption worldwide, led by OpenAI’s, ChatGPT. Whilst many AI-infused crypto-related projects were yet to release anything substantial or garner activity from a large number of users, a lot of these tokens surged in value. Prominent examples included Fetch.AI which surged by over 600% in just a few months. Before long, projects started shifting their focus to AI to attract more attention and demand for their tokens.
Now, more and more people are starting to predict what the next big narrative will be. Below, we’ve highlighted three emerging sectors that could potentially experience increased spotlight in the coming years.
Real-world assets (RWAs)
Following the hugely successful launch of the Bitcoin spot ETFs in the United States, there is anticipation that the Traditional Finance sector will continue to adopt blockchain technology and cryptocurrencies. CEO of BlackRock (the biggest asset manager in the world), Larry Fink, has stated that he believes the next step will be the tokenisation of every financial asset.
The Real World Assets (RWAs) narrative focuses on exactly this, facilitating the tokenisation of assets outside of crypto. In recent weeks, RWA tokens like Ondo (ONDO) and MakerDAO (MKR) rallied on the news of BlackRock launching their tokenised fund on the Ethereum blockchain. With BlackRock and potentially other huge companies so focused on growth in this area, it will no doubt play a role in the Real World Assets narrative in the crypto market.
Bitcoin ecosystem
The narrative of building on Bitcoin is rapidly shaping up to be a pivotal development in the crypto landscape. For the first time, many projects are choosing to build on the world’s first and most secure blockchain network. This movement is largely fueled by the advent of BitVM, a mechanism touted as the missing piece connecting Bitcoin and its emerging ecosystem of layer 2 networks and sidechains.
If this narrative gains momentum, projects that are built on Bitcoin or utilise its infrastructure in any way will likely benefit.
View our in-depth deep dive into the growth of the Bitcoin ecosystem.
Decentralised physical infrastructure (DePIN)
DePIN can be described as a concept that integrates physical infrastructure with decentralised technologies, particularly blockchain. The DePIN landscape is vast and spans multiple billion-dollar hardware sectors such as:
- Cloud storage
- Computing power
- Wireless sensor networks etc.
According to Messari’s data, the current valuation of the DePIN market is close to $2.2 trillion, and it is expected to reach $3.5 trillion in the next four years.
With this growth and a push from well-known companies looking to get a piece of the DePIN pie, crypto projects closely tied to the DePIN narrative will likely grow.
Recap
Narratives are stories or beliefs that affect cryptocurrency prices, particularly over periods of weeks or months. They form for all sorts of reasons and vary greatly in strength. Typically, stronger narratives last longer and therefore generate higher returns for the relevant cryptocurrencies.
Because there is a lack of consensus on valuing cryptocurrencies, narratives can move prices much more in the crypto market than in traditional markets. For this reason, some crypto traders and investors choose to base their entire style on narratives. Ultimately, though, this is just one style of investing or trading that does not suit everyone.
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