The Importance of Narrative in Crypto Cycles
Cyclicality is at the heart of many market participants' view of crypto and finance more generally. From Ray Dalio’s long-term debt cycle and the recurrence of financial crises, to the belief in the Bitcoin halving fueling bull runs every four years, this is a lens that many traders and investors view price action through. The dynamics of market cycles historically have given clues to investors to act more effectively in future market environments. This has been especially profitable in crypto over the past decade due to the high volatility of the asset class. Due to the short nature of crypto’s market cycles and the lack of rules/laws around what behaviours are allowed, crypto has become the place to trade for those with a larger risk appetite than the average long-term investor. However, this also means active management is more important to manage risk (some of these risks do not exist in traditional markets) and to capitalise on changing narratives that can shift very quickly in crypto. This process seems to be speeding up over time as innovation builds on itself and decentralisation is explored in multiple directions at once. In the 2017 bull run investors had a good amount of choice between differing assets for the first time in crypto. The narrative of Ethereum and new ERC-20 projects was a crucial cycle to pick up on to maximise profitability. This is when projects like Chainlink were born (via ICO) that are still vital to the ecosystem today, as well as hundreds of projects that pumped once during that run and have never regained their all-time highs since. Many of these projects are technologically in a far better state now than they were back then but the narrative has shifted. The market cycle no longer considers these projects as anything special to watch (for the most part). As forward-thinking investors, our job is to now consider whether this trend will continue and if the largest gainers from the most recent bull run will be top performers going forward.
In one scenario, top performers of the most recent cycle (Avalanche, Aave, Bored Ape NFT’s etc.) will recover and continue to grow substantially beyond their previous all-time highs. This would be similar behaviour to ETH in 2017 vs 2020/21, where the previous $1400 all time high was broken and significant growth followed. These projects almost certainly won’t be the best performers of the next cycle (that will go to new projects with cheaper starting valuations) but they will make new highs and would arguably be less risky to hold than new tokens from experimental protocols. Anyone holding these sorts of coins throughout the bear market would be relatively well compensated, as ETH holders were in the most recent bull run. An argument in favour of this outcome is that the level of development and utility in these projects is far greater than the ICO tokens of 2017 and are therefore more likely to see continued growth. Additionally, if the bear market is over quickly and there is less time for new innovation to take over there is a greater chance for alternative L1’s in particular to establish their ecosystems for the long term.
The alternative scenario is if the 2020/21 projects are too slow to develop, other protocols will come along that will be more innovative and have lower valuations. Capital will flow to these, the same way they did to previous batches of projects - and they will have fresh hype and momentum on their side. The best of this new crop will have extremely strong price performance and new narratives will form to propel categories of these projects forwards. These narratives could be almost anything (given that collections of monkey pictures can be worth millions of dollars in this market) but there are some areas that appear more likely than others to experience growth. These include:
All of this is of course conditional on the broader crypto market turning bullish again (which almost certainly requires a more bullish macro environment). But when this flip occurs, new narratives will form very quickly. All it takes is a few similar projects to show large gains and the masses will appear. Whether the next projects within these narratives even exist yet is a good question. Maybe out of Aptos, Sui, Canto, ZKSync, Arbritrum, Optimism, Quai, Layer Zero, Starknet, Monad and SEI Network there is something that is the next 100x idea. These are currently talked about as potential next turns of the wheel but maybe we are still too early. Time will tell.
It is always tempting to try and predict what the market “should” do instead of what it will do. Fundamental value is a small and often opaque part of crypto valuations (for most of the market cycle). It is always wise to prepare for a variety of outcomes in any market. But in crypto this is essential to avoid taking excessive risk without the possibility of worthwhile reward. If old and new projects both have the possibility of 90% drops, but only the new ideas are capable of 1000x returns, then it is an easy choice to make. Finding out what that thing will be is where much of the fun and challenge is to be found. But it is not a game for the risk averse. This market is still the wild west of finance, at least for a few more years.