Market hot spots change too fast, how to choose the right crypto narrative to invest in?

The cryptocurrency narrative changes quickly.

SocialFi hype surged from August to September and then petered out. Just two weeks ago, ETF hype was at its peak. The current narrative is AI, ETF, GameFi, L2 and ZK.

Interestingly, “BRC-20” is now ranked fifth, while “LRT” quickly rose to sixth. The “halving” is only 2.3%.

The Telegram Bot narrative is fading, it was the 12th largest cryptocurrency narrative in July-August…it’s now 25th.

Narrative mindshare, measured by the number of tweets mentioning a specific narrative relative to the overall crypto market

There are countless tokens, narratives, and “alpha” related comments on X. Which aspects should you pay attention to? How to choose crypto narratives to invest in?

Here’s my framework for investing in narrative:

I believe the success of any crypto ecosystem is driven by three key factors:

1.Technological innovation

Technological innovation is the key to promoting the development of new projects and gaining attention. Without technological innovation, the encryption industry will stagnate and gradually disappear.

The more innovative the technology, the better its ability to tell stories. Bitcoin started it all. Then, Ethereum implements complex transactions through smart contracts. Then, the arrival of ERC20s and ICOs started the bull market in 2017.

The last bull market was marked by NFT and DeFi, among which AMM, lending protocols, algorithmic stablecoins, etc. were in the leading position. Since the last bull market, there has been a new wave of exciting innovations:

1. L2s and Rollup-as-a-Service (RaaS: Rollup as a Service) technology
2. Account abstractions and intents
3. RWAs (Real World Assets) / On-chain Tokenization
4. Soul-bound tokens are non-transferable tokens that represent a person’s identity on the chain.
5. Ordinals/Inscriptions and DeFi on Bitcoin
6. Restaking (re-staking) and LRTs (liquidity re-staking tokens)

However, if we want to make money, we should know that not all technological innovations are created equal!

2. Token Printing

Token minting (I prefer to call it “printing money”) is like a central bank printing new fiat currency. In crypto, we print money by issuing new tokens.

Token issuance has been very difficult and expensive in the past. Bitcoin cash and gold forks need to run the PoW mechanism! But it’s getting easier to print money in crypto.

When Ethereum launched, the first thing we did was issue more tokens, thanks to the invention of ERC20.

However, the coin crashes of 2017-18 demonstrated the limitations of storytelling alone due to the lack of real technological innovation. In 2020, the emergence of AMM and staking contracts is like a powerful money printing machine:

Staking a liquidity pool token (50% of “shitcoin” and 50% of ETH) to earn more “shitcoin” is a powerful plan, but not sustainable. Curve’s veTokenomics attempts to solve this problem by rewarding long-term staking, but it is becoming less and less attractive.

Not all technological innovations translate into profitable token minting. For example, the process of monetizing account abstractions and soul-bound tokens is complex.

So, where are the opportunities to print money now?

1. RaaS: Rollup-as-a-service just continues to make token minting easier.
2. Alt-L1: Each L1 requires an AMM, lending protocol, NFT market, etc. These tokenless protocols will provide rewards for early users.
3. Ordinals/BTCfi: The flywheel ecosystem and airdrops are now open for loyal users.
4. Staking: Stake TIA, DYM, etc. to obtain more tokens.
5. Re-staking + LRTs: ALT tokens are just the beginning.

What about L2s? L2 tokens can increase their appeal by being used for gas payment and staking, as well as issuing airdrops to their holders. However, several recent events, such as the Arbitrum DAO vote on fake staking, have shown the current limitations of L2 token economics.

3. Storytelling (narrative)

Narratives alone can bring token upside, but without real innovation, they can quickly lose value. Storytelling gives life to technical aspects and tokenomics models, turning them into something that people can resonate with, believe in, and engage with.

It captures people’s imagination and beliefs, creating a powerful community. Without a compelling narrative and belief in the potential of these tokens, there will be little incentive for new users to join and invest in the ecosystem.

Celestia TIA’s “staking to obtain airdrop” is a powerful narrative that helps maintain its valuation, although few people truly understand “data availability”.

DeFi also has all three of the above key factors. It drives technological innovation through smart contracts and self-custody, supporting novel token value creation, but also has a powerful narrative of creating a new financial system.

Terra UST is a notorious example, but it also firmly captures these three key elements through algorithmic stablecoin technology “innovation”, currency flywheel effect (Ponzi), and a story of passive income of 20% APY.

Whenever I see a new narrative, I judge it based on this framework. “Will holding this token get me into an innovative ecosystem that will release more tokens to stakers/early adopters/users?” At some point in the future, maybe it will overinflate and collapse. But now is not the time.

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