When prices go up, fundamentals become better. When prices go down, fundamentals become worse.
This may sound like a joke (and it is), but there is a truth behind it. Not only it is that beliefs shape our world, narratives define our reality. This is especially true when it comes to speculation in the age of memes and social media.
Individuals in aggregate can believe something and create a collective outcome that wouldn’t have been possible through a centralized system, but only through the decentralized propagation of memes and narratives through social media. As you’d expect, this applies to Bitcoin, Tesla, GameStop, Dogecoin, and many other examples from recent years, and we’re only going to see more of it in the future.
Have you been here during the last bear market? You may be one of those people who went on and on to your friends about how internet money is the future, and none of them really cared. The Bitcoin market cap is now two, five, ten times larger than it was then and suddenly all of them are asking you if they should buy in to not miss out on the future.
Narratives are very important in any market, but they are practically the core of crypto. There isn’t any standardized framework to value any of this stuff. And even if there is, narratives still matter a lot regardless.
Assets have fundamental value and a kind of speculative premium on top. Even if the fundamental value is zero (which is, let’s face it, most of crypto), the asset can accumulate a high speculative premium.
Let’s say the price of Apple stock goes up 20%. Analysts can compare the new price to their valuation estimation tied to the performance of Apple the company as to what they think a ‘fair’ price should be. Then they determine that the Apple stock is now, say, overvalued.
What if the Bitcoin price goes up 20%? Well, the market now thinks that Bitcoin should be worth that much. We can look at various metrics, on-chain activity, volume profiles, hash rate, miner activity, google searches, compare it to the stock-to-flow model, app usage, and hundreds of other indicators which can be useful but ultimately won’t tell us what the price should be. No one knows, and that’s exactly the point – it’s the result of collective imagination.
The comparison between BTC and AAPL isn’t completely apt since we know that stocks also don’t just clinically follow whatever they “should” be worth – it’s still the market pricing them. People who didn’t understand this in the equity markets got a good taste of it with the GME and WallStreetBets saga. GameStop was a failing company in a tough spot, and yet, the stock price melted up harder than Dogecoin when Elon Musk tweets about how its block size should be increased by 10x.
The price is ultimately determined by the most basic market forces – supply and demand. Even so, the price of Apple stock can be tied to Apple the company, while most cryptocurrencies don’t have anything concrete to tie their value to. And this is why we have to pay close attention to narratives.
Bitcoin narratives over time
Bitcoin was memed into existence. Memes can have tremendous power and can spread very rapidly over the internet.
To create a new financial system, the only thing you need is a potent zero-to-one moment, a few million people religiously believing in it, attached financial incentives, and a bit of time. Give it a few decades, sprinkle in some catalysts like government money printing, a global pandemic, an increasingly remote workforce and you’ve got yourself a new internet of value that runs a good portion of our economy.
Let’s examine how the historical Bitcoin narratives changed according to this graph created by Hasu and Nic Carter:
As you can see, Bitcoin started as a peer-to-peer electronic cash system as we know from the Bible, then it was going to become a payment network, then it was used to buy cocaine and acid on Silk Road, then it became censorship-resistant digital gold, then the base asset for the cryptocurrency asset class, an inflation hedge, an institutional-grade macro asset, and whatever else people think of it and use it for these days.
Mind you, this chart is from 2018, long before governments started frantically printing money as a response to the pandemic or the likes of Michael Saylor and Elon Musk got into Bitcoin. We could probably extend these narratives, only to potentially extend them more in the future. Though it’s also possible that consensus will settle on one or a select few narratives over time, as the role of Bitcoin ossifies in our society.
The point is that, in addition to being a technology that incorporates computer science, cryptography, economics, there is an inherent social layer to Bitcoin. Money and value are social concepts, and just like any other technology, they change over time. Who knows what Bitcoin narrative will be dominant in 2030? We’ll figure it out together in this internet hive mind.
OK but sir – up or down?
So, what does this mean for you as someone trying to escape the dreadful reality of a 9-5 with the only few options being speculating your way out of it with dog coins? Well – and this may be a bit of a disappointing answer – it just means, pay attention to what’s happening.
As bullish narratives get strong, they can drive up the price a lot, and as bearish narratives take precedence, they can crash the price a lot. Add to that an abundance of forced selling (or buying) in the form of liquidations in a predominantly overleveraged market, and we’ve got ourselves a solid foundation for outlier events.
This is the kind of environment in which you can get extreme moves like the one in May 2021, where some one thousand billion dollars were wiped out from the market in a matter of days: The Cleansening. Source: Coingecko
As a side note, if you’d like to read some excellent threads about how the big boys think about liquidations and events like this one, follow Sam Trabucco to get a glimpse.
It can also be useful to pay attention to how the market reacts to certain types of news events or apparent changes in the narrative. Context is extremely important to consider. For example, if some very bearish news doesn’t have much of a reaction, we are probably in a strong bull phase. Conversely, if some bullish news has a disproportionately bearish reaction, the bears may be in control for now.
If you pay attention to the underlying narratives and how the market reacts to these narratives unfolding, you can take advantage of certain situations or save yourself from making stupid mistakes.
We’ve established that narratives play a major part in pricing markets. Not only that, they practically define their realities. The ability to propagate these narratives to millions of people in a matter of seconds magnifies this effect even further. As a result, the crypto markets exhibit very strong reflexivity, both to the upside and the downside.
This isn’t anything new, but what is new is that almost anything can become a market thanks to the permissionless internet of value. While many things have been markets for thousands of years, there was no way to price them – but now that’s changing.
If you’re not thinking about this new reality in your trading or investing, you’re, well, hate to break it to ya – NGMI in this decade.