What is Narrative Trading?

When investors or traders use stories, news, and events surrounding cryptocurrencies to make investment decisions, they engage in narrative trading. These stories, news, and events can affect the prices of cryptocurrencies either positively or negatively and cause sharp movements in the prices of cryptocurrencies. Usually, traders may make massive returns or experience capital loss when narrative trading is used.

How do Narratives Form?

Many factors can shape the narratives of cryptocurrencies. Some of these factors are market sentiments, social and economic news events, widespread adoption, the fundamental technology behind the cryptocurrency and its feasibility, the collective behavior of investors, and the cryptocurrency’s use case and utility.

For example, a news story of an impending regulatory measure on a cryptocurrency can affect its price negatively, as it happened with the SEC’s attack on XRP in 2020. Similarly, the news reports about the launch of AI tools such as Chat GPT led to the emergence of AI-related tokens. The adoption of AI in cryptocurrency caused the value of AI tokens to rise exponentially.

Also, an announcement on social media of a partnership with a reputable company or organization can be viewed positively by investors, thereby leading to a surge in price. The hype created on social media regarding a project, influencers’ propaganda, and discussions in online groups and forums can fuel narratives surrounding cryptocurrencies.

Popular Narratives in the Last Few Years

Narratives hugely influenced the previous bull cycle, which started in 2020 and ended in 2021. Some of the prominent narratives include:

Alternative L1s

The increasing fees on the Ethereum network led to the emergence of alternative layer-1s such as Solana and Avalanche. These alternative L1s offered lesser fees for transactions. Projects like Solana, Cardano, and Avalanche were often called “Ethereum Killers” by crypto analysts.

Further, many layer-one projects thrived, stirring healthy competition in the crypto ecosystem as alternative L1s constantly improved their technologies.

Play-to-Earn and Move-to-Earn Projects

In 2021, play-to-earn projects became more popular. The rise of the Axie Infinity blockchain gaming project triggered this popularity. Several projects promised to reward users with tokens when they perform specific platform tasks.

These projects were broadly categorized as X-to-Earn projects. There was the Play-to-Earn (P2E) model, which rewarded users for their performance while playing games. Then, the Move-to-Earn (M2E) model rewarded users with digital assets using DApps. Among the popular ones was STEPN. These x-to-earn projects easily built a crypto community, and the solid crypto community backing around these projects attracted more retail investors.

Metaverse Projects

Even though the Metaverse is not a new concept, as it dates back to 1992, there was a sudden hype about the Metaverse blockchain narrative from December 2020 through 2021. Decentraland is an Ethereum-based digital game and was the first blockchain-enabled metaverse project. The project launched in 2017 but only came to the limelight in 2021.

In October 2021, the metaverse narrative peaked. Decentraland’s native token (MANA) soared in value by a whopping 600% between October 2021 and November 2021. Since the metaverse was labeled as the next big thing, other metaverse tokens like SAND and ENJ also soared during that period. The Metaverse narrative gained further traction when Facebook rebranded into Meta as part of its efforts to promote the metaverse development.

Non-Fungible Tokens

Non-fungible tokens shook the blockchain ecosystem in March 2021 when Jack Dorsey revealed that he would be selling his first-ever tweet. The former Twitter CEO eventually sold the tweet as a non-fungible token for $2.9 million. Following that, more big numbers were recorded, like the Beeple _First Five Thousand Days _NFT, which sold for over $69 million.

The number of NFT projects launched in 2021 quickly skyrocketed from tens to hundreds. NFTs were perceived as the next big thing, and even crypto exchanges joined the NFT train. On the 7th of January 2022, NFT trade volume reached a record high of $450 million in 24 hours. The huge trade volume reflected investors’ interest in NFTs.

Additionally, big companies like Nike and Addidas also integrated non-fungible tokens in their business models due to the narrative around NFTs and digital collectibles. Notably, in the later part of 2022, interest in the NFT market eventually declined as new narratives were formed.

Trending Crypto Narratives in 2023

Since the start of 2023, the market has experienced a slightly bullish trend and has also been characterized by narratives. These are some of the narratives that have dominated the market.

Liquid Staking Derivatives (LSDs)

Liquid staking derivative platforms became famous last year due to Ethereum’s migration from proof-of-work to proof-of-stake. LSD projects made it possible for stakers to have exit liquidity. Liquid staking also made it possible for stakers to put their assets to use before the staking period elapses. Users can then use the Derivative tokens to perform DeFi activities such as lending, trading, yield farming, and providing liquidity.

The idea of liquid staking birthed a new branch in the DeFi ecosystem. Although the Ethereum merge is complete, liquid staking protocols like LIDO still thrive. LIDO significantly increased in value in the first two months of 2023. The token soared by more than 200% within 60 days.

Artificial Intelligence

Since the launch of Open AI’s ChatGPT in November 2022, there has been fierce competition between Microsoft and Google. More people have become interested in Artificial Intelligence in the past months, with Google investing billions in its Chatbot Bard. The excitement surrounding AI has seen the prices of AI-related tokens increase.

Some AI-enabled Blockchain projects are Render Token (RNDR), Oasis (ROSE), Fetch.ai (FET), and The Graph (GRT).

• Render Token (RNDR): Render token was launched publicly in 2020, and the project was built on the Ethereum blockchain. The project was created to link artists and studios requiring GPU computational capacity with mining collaborators prepared to lease out their GPU capabilities. Recently, the developers have tilted toward integrating artificial intelligence with the web3 project.
• Oasis (ROSE): The Oasis network is a layer-one project effective for building and scaling AI, web3, GameFi, and metaverse-inclined projects. The Oasis network is multi-layered. This makes it scalable, future-proof, and suitable for AI projects.
• Fetch.ai (FET): Fetch.ai is an AI lab focused on developing a decentralized machine-learning network fueled by the FET token. The team behind Fetch.ai aims to enable seamless access to valuable datasets. The Fetch.ai model will have an implementation in various fields like transportation, DeFi, and smart energy grids.
• The Graph (GRT): The Graph is the biggest crypto protocol focused on data indexing and AI. As of October 2020, The Graph boasts a worldwide community encompassing over 200 Indexer Nodes within the testnet and a roster of over 2,000 curators actively participating in the Curator Program. The Graph secured funding from community members, strategic venture capital firms, and prominent figures like Coinbase Ventures and ParaFi Capital for network advancement.

All the AI tokens highlighted above and many more can be purchased on Gate.io.

How to Identify Narratives

Traders intending to take advantage of narratives in trading have to be able to spot when narratives are beginning to form. These are some tips that can help:

• Identify projects that aim to solve problems in the Blockchain industry. Such projects can be a force for innovation.
• Stay updated with the news by following relevant topics and discussions of innovative projects. Traders can stay updated with project information by following social media accounts and influencers and engaging in online discussions in forums.
• Attend crypto conferences and events. These conferences and events reveal first-hand information regarding new technologies, opportunities, and projects.
• Research specific projects or cryptocurrencies of interest. Traders need to be aware of relevant details regarding a project or cryptocurrency. Traders can achieve this by reading documents on the project, for example, Whitepaper, joining the project’s discord groups, and conversing with the administrators.
• Use organizing tools that can help keep track of narratives. For example, traders can use Notion to log findings conducted from their research. These organizing tools can be known as narrative trackers and can be a good source for identifying trends useful in trading decisions. Other organizing tools that can be great options are Excel and sticky notes.

How to Trade Using Narratives

Traders use narrative trading when making investment decisions to analyze and interpret these news, stories, and events to predict market trends and capitalize on them for profit. These narratives do not just affect the day-to-day value of cryptocurrencies or cause sharp movements in price; they can also be a strong determinant of the beginning or end of bullish or bearish market trends of that particular cryptocurrency. These are some tips that can help traders make good trading decisions:

Identify Emerging Narratives

Traders can find the tips highlighted on identifying trends in this article beneficial. Trading decisions may be made once a trader can identify high-potential projects with their features using the suggested tips.

Manage Portfolio Risk

Managing portfolio risk involves evaluating the project’s long-term or short-term performance. Risk management strategies are essential to minimize risk. These strategies include using the stop-loss feature, diversifying the portfolio, and adequate position sizing. All of these should be done while paying attention to the overall portfolio.

Open Positions

Traders can enter positions using DeFi or CeFi platforms. They can do this by staking, trading, or providing liquidity. Traders can also plan the periods when a position is entered based on price timing and market trends.

Follow a Good Exit Strategy

A trader’s risk management strategy should have a clear, easy-to-follow exit plan. A trader must have identified if setting fixed stop losses, taking profits, trailing stop losses, or holding is the best exit strategy for a project.

Benefits of Using Narratives in Trading

Narrative trading can be a daunting task because it involves a lot of hard work. Traders have to conduct research and analysis to be able to take advantage of market trends. Traders can use this to capitalize on significant moves in the market. Analysis based on findings obtained from narratives can also help a trader identify when a narrative is dying down and avert a potential risk.

The Dangers of Using Narratives in Trading

Most narratives form because of the hype about a particular token or cryptocurrency, which can cause traders to experience FOMO. FOMO is a term used in trading, and it means ‘Fear of Missing Out.’ The Fear of Missing Out makes traders jump into trades without conducting sufficient research and analysis. When a trader makes a trading decision because of FOMO, this may lead to a loss of capital or investment.

Conclusion

Narrative trading is hard work and potentially rewarding, but investment decisions can only be made with proper research and analysis. Even when traders conduct extensive research, there is no guarantee that they will make profits. As a result, traders need to employ risk management strategies to prevent exposure to unplanned risks associated with the uncertain nature of the market.