You will keep getting wrecked in crypto if you don’t understand crypto market narratives and how to use them in your favour.
A lot of investors invest their retirement funds, school fees, house rent, borrowed money, life savings, etc., in crypto when the market is peaking, with the expectation to double their money before the market dumps, only to get caught up and regret ever taking such a step.
Some commit suicide.
What Are Narratives?
The power of storytelling is undeniable. We have been telling stories for thousands of years to make sense of the world.
A narrative is a story or explanation that helps to make sense of events or phenomena. Narratives can persuade or influence people by shaping their perceptions and emotions.
A crypto narrative is a story about cryptocurrency often used to promote a particular cryptocurrency or technology by highlighting its unique features or potential use cases. These narratives include positive and negative narratives.
Imagine if a narrative promotes the idea that a certain cryptocurrency will increase in value in the future, it would encourage more people to buy it, leading to price increases. This can create a self-fulfilling prophecy, as the increased demand leads to higher prices, reinforcing the original narrative. On the other hand, if a negative narrative emerges about a cryptocurrency, it may discourage people from investing in it.
Some Common Narratives That Have Been Used in the Crypto Market Include:
1. The Narrative of Decentralization
This narrative promotes the idea that cryptocurrencies are decentralized and not controlled by any single entity, which is a key advantage over traditional financial systems. The decentralization narrative is often used to promote cryptocurrencies like Bitcoin and Ethereum, which have decentralized networks and consensus mechanisms.
2. The Narrative of a “Store of Value.”
This narrative promotes the idea that certain cryptocurrencies, such as Bitcoin, can be used as a store of value similar to gold. This narrative has been particularly influential in the past few years, as Bitcoin’s price has reached new all-time highs, and more people have become interested in cryptocurrencies as an investment.
3. The Narrative of “Smart Contracts.”
This narrative promotes using blockchain technology to automate contracts, build decentralized applications, and build decentralized finance and other legal agreements. The smart contracts narrative is often used to promote cryptocurrencies and platforms that offer smart contract functionality, such as Ethereum, Solana, BNB Chain, etc.
Narratives About Crypto can Come From a Variety of Sources, Such as
- media coverage
- social media posts
- public statements
- actions of influential individuals such as Elon Musk and CZ.
- actions of influential organizations such as the SEC
Narratives can also affect the overall crypto market. For example, suppose there is a narrative that suggests that the crypto market as a whole is experiencing a bubble or is otherwise unsustainable. In that case, it can lead to decreased investment and overall market decline.
It’s important to note that narratives are not the only factor that can affect the crypto market, and it can be challenging to predict how a particular narrative will impact the market accurately.
However, understanding the role of narratives in the crypto market can be helpful for anyone looking to make informed investment decisions.
A Brief History of Bull And Bear Cycles as the Major Crypto Narratives.
Bitcoin halving is one of the strongest crypto narratives that push the crypto market to new all-time highs. I say this due to past events. Bitcoin halving is an event that happens after every 210,000 blocks are mined(approximately every 4 years).
As of writing this, miners or people who use their computers to participate in Bitcoin’s blockchain transaction validators are rewarded 6.25 bitcoins(BTC) per block.
The first ever block reward was 50 bitcoins per block until the first halving happened in 2012.
Bitcoinblockhalf mentioned the exact date and why bitcoin halving is done.
New exchanges, Silk Road and Mt. Gox (2012-2015)
In 2012, the cryptocurrency market centered primarily around bitcoin and about 30 altcoins.
Popular price tracking services and sites like CoinGecko or CoinMarketCap did not track Bitcoin prices before April 2013, when coinmarketcap was launched. The main utility bitcoin had was to send and receive payment from peer to peer.
The Silk Road, a digital market where illegal trades were conducted, was a large driver in onboarding new users. Mt. Gox. was the largest bitcoin exchange by volume worldwide.
During the period from 2012 to 2015, the narrative was launching new exchanges. Due to the nascent stage of the crypto space, investors believed they could capitalize and position themselves to provide trading platforms. So they did.
But there was a bigger problem. Their investors weren’t optimizing for security and managing users’ assets. They were more focused on providing an efficient trading platform. This led to the repeated hacks of Centralised exchanges worth more than 1 million bitcoin being stolen.
- In March 2012, Linode was hacked for 46k BTC.
- In May 2021, Bitcoinica was hacked for 18k BTC.
- In September 2012, Bitfloor hacked for 24k BTC.
- In December 2013, Sheep Marketplace was hacked for 96k BTC.
- In February 2014, Mt. Gox was hacked for 850k BTC.
These were retail investors’ hard-earned money.
After bitcoin peaked in December 2013, coupled with the China ban and Mt. Gox, being the largest hack, the price of bitcoin dropped by 80% the following year. This marked the end of the bull market. “Many of the newer investors left the industry. Those who remained continued to build and develop the industry.”
Those who remained continued to build and develop the industry. Some started creating content to educate new people about the technology. Investors started building more sophisticated Centralised exchanges that would secure users’ assets.
During this boring phase of the crypto industry was when Ethereum was born. Ethereum was officially launched in 2015. The introduction of Ethereum made the crypto industry go beyond sending and receiving payment. It was more sophisticated. Ethereum introduced smart contracts, which allowed the creation of advanced applications such as decentralized exchanges, non-fungible tokens(NFT) and Decentralised applications, decentralized finance, Decentralised Autonomous Organisations (DAO), etc.
ICO and the birth of DeFi(2016-2019)
Ethereum brought more accessibility to crypto and created a platform to build new products in crypto. It was during this period that new projects started launching. Projects that couldn’t bootstrap had to raise funds from the public.
The birth of an Initial Coin Offering(ICO), traditionally known as an Initial Public Offering(IPO). Where new companies give out shares of their company to retail investors in exchange for money. In crypto, new projects give their investors early access to their tokens in exchange for money.
The money is often used for marketing, advanced product development, salaries, etc. However, at a point, ICOs began to lose their purpose. Some shady entrepreneurs raised $10+ million with a website, unknown team members, and rewritten Whitepapers. Retail investors were collectively investing millions of dollars, and after a few weeks, the project’s social media handles became inactive. Founders would stop responding on their Telegram channel. Users’ funds are gone.
ICOs were the major driver of the 2017/2018 bull cycle. When retail investors weren’t receiving their capital in full or their return on investment(ROI), they stopped investing in ICOs. Some ICOs that were selling at this stage wasn’t selling out. People got tired of being scammed. The crypto market cap fell from $800 billion to $100 billion. This ushered us into a bear market.
The same thing happened during the 2014 bear market happened again “Many of the newer investors left the industry. Those who remained continued to build and develop the industry.”
Take a look at this.
- On 1st January 2017, AAVE began as EthLend
- On 1st March 2017, Livepeer was introduced
- On 1st August 2017, Compound was introduced
- On 1st April 2018, The Graph was introduced.
- On 2nd November 2018, Uniswap launched.
These protocols further expanded Ethereum’s blockchain utility and became the foundation of DeFi. All of them did their all-time high in the 2021 bull cycle, mostly because they didn’t have a working product to market – some had no tokens then. Uniswap airdropped its token in 2020.
Leverage, Institution, NFT, DeFi, and Metaverse[2020-2022]
Leverage, institutions, NFT, DeFi, and Metaverse drove the 2021 bull cycle. I mentioned DeFi in the previous cycle, but it wasn’t fully functioning. It was at the idea stage. In 2020, crypto exchanges launched perpetual swaps and futures trading.
During this period, the government injected money into the economy in response to the Covid19 pandemic, where businesses had to be halted, and people were made to stay home. Investors were enticed to leverage bitcoin. This led to a massive bull run, and bitcoin hit an initial price peak of $63,500 in April 2021.
Eventually, the price dropped down to $30,900 within three months.
The mini bear market of 2021 was caused by overleveraging and the use of derivatives by futures traders. The high funding rates at the time indicated that the market was heavily long on bitcoin, and traders were willing to pay high funding fees to maintain their positions. This funding rate issue persisted for six months as traders continued to increase their leverage using cryptocurrency as collateral. However, when the value of this collateral dropped, which triggered forced selling and liquidation, driving the price of Bitcoin down to $29,000.
Additionally, negative media coverage suggesting that bitcoin mining was causing environmental and social problems also contributed to the three-month bear market. In May 2021, these fears were further exacerbated when Tesla stopped accepting Bitcoin as a payment option.
The market began to recover in July, with traders becoming more mindful of their leverage.
However, this leverage was concentrated in the hands of centralized DeFi (CeFi) companies and hedge funds such as BlockFi and Celsius.
In November 2021, bitcoin reached a new all-time high of $68,900. However, the lack of transparency in the operations of these CeFi platforms led to another market downturn. CeFi platforms offered investors easy access to DeFi yields of up to 20%, but they could provide users with only 3-17% APY and used the difference to beat the advertised yield offered to users. During the peak of the market, this was relatively easy to do.
The federal reserve contributed to the second wave of the bear market when it started raising interest rates due to the slow-growing threat of inflation.
The second wave of the bear market started when UST broke its 1 UST:1 USD peg. This forced a heavy sell-off by traders, which affected both LUNA and UST prices, and wiped out over $35 billion in value from the crypto market.
The ripple effect affected many institutional trading firms heavily invested in Terra. Including CeFi’s invested users’ funds in Anchor, a lending and borrowing platform built on the Terra blockchain.
Despite all these events, the core DeFi protocols, such as AAVE, COMP, UNISWAP, etc., remained strong and resilient with their sustainable APYs and business models.
Where do You go From Here?
One of the major reasons everyone needs to understand narratives is to help you when making investment decisions. When you see certain narratives, you don’t need anyone to tell you that the market is bullish or bearish.
For instance, as of writing, the crypto market has been moving sideways for weeks.
It is expected that bitcoin could go below $12,000. The reason is that investors are expecting a federal pivot in mid-2023. According to Alessio Rastani, the market dumps further after the Fed pivot.
Narratives are not your only weapon to win in the crypto market. You need to understand the tokenomics of any crypto project you want to invest in. Perhaps you don’t have money to invest, you should develop high-demand skills in the crypto industry.
Understanding crypto market narratives would convince you why you shouldn’t be among those who would buy bitcoin at the top and hold it for 10 years. Instead, you would buy during the bear market and sell during the bull market.
This sounds simple and easy, but when the time to take action comes, our emotions cloud our judgment. Sometimes, when the market is down and more bad news keeps getting published, it is easy to get discouraged from applying this simple strategy.
Sometimes, the FUD gets so high that we question ourselves, asking, “are we going to see another bull cycle?”
We have seen this happen several times. You should always look at the bigger picture and play the long-term strategy with patience, discipline, and action.
Uniswap, AAVE, Comp, etc., started buying in 2017/2018. Their tokens didn’t get attention until the 2021/2022 bull cycle. Solana started trading below $1 in April 2019. The token price didn’t make its investors wealthy until the 2021 bull cycle, with an all-time high of $260.
Whenever there is a bull cycle, everyone is excited and optimistic such that we forget that a bear market exists. You can imagine the extent of the bull run that would make some people sell their houses to invest in crypto.
Also, when there is a bear market, the market is filled with pain and pessimism that no one would believe that the market would ever be bullish, for instance.
- The stock market crashed in October 1929. Popularly known as the great depression.
- In October 1987, 58 years later, when people had forgotten that the market crash existed, it crashed again.
- Twenty-one years later, in July 2008, when people had forgotten that the market crash existed, it crashed again.
- Twelve years later, in 2020, the Covid19 crash came. Both the crypto and stock market crashed. The market recovered quickly in less than 2 months, and it wasn’t as bad as the previous market crashes. The crypto market was also hit heavily.
It can be difficult to know when the market is at its low point. This is why you must develop a plan and stick to it. Minimize the guesswork and maximize your discipline as an investor.
Let your focus remain on investing in fundamentals, also known as narratives, not hype and excitement. As those profits come quickly, they can go quickly.
Investing will be emotional, whether exciting, discouraging, or downright terrifying. Investor confidence, or lack thereof, has a major impact on the longevity of bull and bear markets. There isn’t an investor that hasn’t felt the pain of a bear market or the thrill of a bull market. But the ones who see the best returns are those who have a long-term strategy, patience, and discipline.
Another rule of thumb is not to invest money you’ll need in the short term.
Disclaimer: This is not financial advice. This is for educational purposes. Contact your financial advisor before taking any action.