Narrative Trading: The art of being early
Narratives are simply accounts of related or connected events, often with a particular perspective or interpretation. They serve to convey information, emotions, or experiences through storytelling.
In the crypto space, a narrative is a prevalent series of related events/products that influence investors’ perceptions, sentiments, and decisions. These narratives are perceived to be bundled in some sense, creating an overarching structure that represents different factions and pockets of investments in the crypto space.
Common Narratives we have now are:
- AI narrative
- GambleFi narrative
- GameFi/P2e narrative
- Layer 1 narrative
- Layer 2 narrative
- Real World Assets (RWA)
- Perpetual Dex and a host of others
To successfully trade these narratives, you have to understand liquidity flow, social sentiment, and product fit; this is where trends come in
Trends refer to prevailing and evolving patterns that show a general direction in which the crypto space is developing or changing. They are usually characterized by notable changes in social sentiment, significant shifts in liquidity inflow, and a surge in related products (launches). For this reason, narratives must be in trend for them to be worth investing in.
In other words, a narrative will remain dormant until it becomes a trend.
How Trending Narratives Form
- Product Clusters:
These narratives capture a range of products solving pressing issues both in the Web3 and Web2 space. Price volatility within this narrative typically remains weak until adoption, which is indicated by a surge in utility demand, the emergence of product-market fit use cases, and an overall maturation of the narrative. Also, Projects under these narratives are usually long-term gems and must be traded accordingly.
How to Play this narrative:
Risk-tolerant approach: DCA when narrative is dormant and sell when narrative is trending
Risk-averse approach: Wait till liquidity flows into the narrative before investing
Here are some narratives in this category:
- Account Abstraction
- Zero Knowledge
- Ominichain
Here’s a thread on the Omnichain narrative
- Successful runners
These are narratives that gain popularity cos one or two projects in that narrative have outperformed the market, capturing the attention of traders and essentially reshaping social sentiment during that period.We call these projects first runners, and they’re responsible for drawing attention
Good examples are $AXS (Gamefi 2021 runner), $PEPE(Meme runner), $RIO(RWA runner),$RLB (Gamblefi runner)
How to Play this narrative:
- Identify and analyse the first runner
- Assess the extent of its influence within its own narrative based on this analysis
Approach
Risk-averse approach: Find similar projects, preferably with an optimised outlook (i.e., better UI/UX, fixed bugs and loopholes, etc.), in the same narrative and invest in those
They are called beta plays
Risk-tolerant approach: invest in the runner and rotate profits into beta plays
Note
Be careful trading this category of narrative as builders tend to introduce more products to the market than the available liquidity can handle in a bid to capture some of the liquidity. This results in oversaturation and eventually diminishing interest, which in turn leads to capitulation.
Alternative Play:
- Community-driven narratives
The crypto industry is community-centric, as communities play pivotal roles in the success of crypto projects. Communities can make or break a project, even if it has impressive usecases. For instance, by exclusively speculating on the price action of tokens without actually using the products, communities can kill a good project
But on the flip side, communities can take a meme coin worth next to nothing, from $4k, and turn it into a billion-dollar sensation through extreme speculation, gambling, and wild enthusiasm
What if I told you it doesn’t end there?
Although rarely done, communities can collectively shape their own narrative. This narrative is usually influenced by an external factor (event, news, etc.) that compels the community to act in unison and create a narrative
A good example is the real yield narrative
Projects that previously generated substantial protocol revenue and offered real yields to stakers and farmers were considered normal before the emergence of the “real yield” narrative. But, as discussions around the ETH merge and ETH’s real yield started to circulate, projects offering real yields began to gain significant traction
(Here’s a research that speaks to the topic)
This essentially:
- shifted social sentiment,
- causing increased liquidity inflow (real yield token pumping hard)
- in turn, causing most builders to shift their project focus to delivering real yield
- which further attracted investments
- essentially creating a flywheel
A more recent example is the Meme2.0 narrative.
Narrative Trading Strategies
To find early narratives before anyone finds out you need to monitor money flow on-chain using tools like Dune Analytics, Coingecko and Defillama.
- Go to Defillama.com
- Navigate to Categories (This shows the combined TVL of each narrative)
- Assess the charts to find out TVL changes in narratives over time
For a more detailed look into these narratives including
- Average Percent Return per Week
- Details on volume traded
- Transaction count
- Top Whale wallet of each narrative
Go to @cryptoKoryo Dune Dashboard here https://dune.com/cryptokoryo/narratives
Now that you’ve determined which narrative is getting attention, head on to Coingecko.com to research potential plays. What you want to do is find the runner and either take the risk-tolerant or risk-averse approach as aforementioned
To do this:
- Navigate to the category section
- Search for the narrative you found in your early assessment
- The first runner should be at the top of the list
- Do your research and ape according to your risk appetite.
This is how I noticed the Gamblefi narrative before it got big
Alternative play:
Instead of going for beta plays in the same narrative offering “better” services but similar products, It might be wiser to invest in projects building a usecase around the first runner
For example;
- First Runner: Unibot
- Beta Play: $UNICHAD (revshare and $UNIBOT buyback)
Other examples are $MONKEY and $PENDLE
This strategy is only useful for established, already-formed narratives and is most suitable for hunting BETA PLAYS. By using this strategy you’re checking to see which narrative is currently on the receiving end of liquidity flow and capitalising on the trend for profits.
Based on this information and the continuous success of friendtech, I’d wager the socialFi narrative is up next.
Concluding Thoughts
Trading narratives is cool and all, but it’s only one way to trade liquidity;
don’t get so carried away that you miss out on liquidity flowing into ecosystems
I wrote a thread on how to trade liquidity flowing into ecosystems. Check it out here
This liquidity flow type only occurs in the bull market when enough liquidity drives the native coin and trickles down the entire ecosystems
That said, $INJ is def one to look out for
If you like content like this, consider following me on twitter at god_crypt.