Narratives vs catalysts: how to identify and play crypto narratives
Thread923 words
Framework for narratives (technology, use case, event or externally driven) versus shorter-lived catalysts, with EIP-4844, Arbitrum STIP, EigenLayer and Celestia as examples. Argues an investment thesis should be built on narratives and exited when catalysts run out.
Key claims
EIP-4844 is a catalyst for the rollup narrative, not a narrative itself
EigenLayer is a catalyst for LSD and started a restaking narrative
Celestia arguably started the modular narrative
ETH is over 2k and we are so fking back, that it's time for "how to master the bull" part 2! 💸
The first part focused on general tips & lessons learned from past cycles. 👀
This second part is different. This time it's all about the narratives! 🚀
Pay attention this is ALPHA!
💰 What are narratives and why do they matter? 💰
Narratives refer to the overarching stories or themes that shape investors' perceptions and drive market trends.
Narratives are crucial for several reasons:
💰 Shaping Investor Behaviour: Narratives can significantly influence how investors behave.
📈 Driving Market Trends: Narratives can create and sustain market trends.
💸 Impacting Asset Valuation: The value of a token is often influenced by the strength and popularity of the narratives around it.
However, narratives can be hard to define and are often controversially discussed.
That is mainly due to two characteristics:
⚠️ Narratives are ever-evolving & dynamic
Narratives are responsive to External Factors.
They can change in response to external factors such as regulatory changes, technological advancements, or global economic conditions.
⚠️ Narratives are not singular
In most cases, it's the projects that build on a narrative or try to hijack a narrative rather than projects actually driving a narrative.
But if you find a narrative-driver at an early stage, be prepared for life-changing gains!
Narratives can also evolve around many aspects of a project.
That means a project can also be associated with more than one narrative.
But there tends to be a dominant one.
⚠️ Not all narratives are the same
Some narratives might apply to the entire market.
Some only to specific ecosystems.
Some only to projects built on specific technologies.
Some narratives shape a future for entire ecosystems.
Some might be based on shot-term catalysts.
Okay, but let's look at this in practice! We will focus on two core questions:
🔍 How can you identify narratives?
♟ How do you play them?
So let's dive in!
🔍 How can you identify narratives?
Narratives can emerge around various things. They can be:
⚙️ Technology-driven (rollups, ZK)
🚀 Use Case-driven (LSDfi, SocialFi, RWA)
📅 Event-driven (Arbitrum STIP)
🏦 Externally driven (ETF, (geo)politics, monetary policy)
Narratives are built on ground-breaking technical innovation (rollups, ZK).
They are built on use cases that address large markets (RWA), that unlock a lot of capital (LSD) or that introduce new, ground-breaking concepts (SocialFi).
They are driven by specific catalysts (more on this shortly) that promise to positively impact growth in a specific sector or ecosystem.
Or they are driven by macro-economic, political or regulatory forces and tend to be overarching narratives that are not tied to specific assets (unless its a BTC or ETH ETF kek).
Looking at these narratives today might make them seem obvious.
But don't be mistaken.
Spotting them early on, being willing to bet on a new use case or on new tech and having conviction in your thesis is hard.
But...
How can you play a narrative you might have found?
🤔 Narratives vs. Catalysts
Often, a certain project/product, an external event or a technical innovation acts as a catalyst, strengthening a certain narrative.
However, while more specific in nature, they might be rather short-lived compared to the over-arching narratives.
However, being able to identify catalysts is almost as important as the narratives themselves.
Let's have a look at an example:
A lot of people are talking about EIP-4844 or proto-danksharding.
An upgrade to Ethereum's data availability capacity that introduces exclusive data space for rollups to dump data to.
However, EIP-4844 is not really a narrative. It's not a project you can invest in either.
But if you understand what it does, you might see how EIP-4844 benefits rollups and how it could hence be a catalyst for the over-arching rollup narrative, you might be able to catch opportunities early.
Dive deeper.
Where do you see the most potential?
The biggest opportunity?
Make your moves and wait for the narrative to play out and the catalysts you bet on to hit.
The same goes for other (more short-term) catalysts:
Arbitrum STIP coming up?
Might be a catalyst for the Arbitrum narrative, no?
Where will the money flow?
Position yourself accordingly.
In good profits? No more catalysts on the horizon?
Exit.
Rotate into long term plays.
Catalysts can also kick-start narratives.
Eigenlayer is definitely a Catalyst for the LSD narrative.
But it's so big, it has even started its own narrative around restaking.
One might argue it was Celestia that started the modular narrative in the first place.
But the Celestia launch is defnitiely also a big catalyst for the over-arching narrative.
Some catalysts might be long-term oriented.
Others might be short term drivers only.
Think EIP-4844 vs. Arbitrum STIP.
Identify narratives.
Look for catalysts.
Why?
A solid investment thesis is key!
I have mentioned this in part 1 already but this is so key, I have to repeat it.
Having a solid investment thesis is a necessity if you're not here to gamble.
So what is an investment thesis?
An investment thesis is based on narratives that you believe in.
You believe in DeFi?
You think on-chain trading will be big?
You are a rollup maxi?
Build your beliefs out into a vision of the future.
Where will the most value be created?
Where will the money flow next?
Position yourself accordingly.
Go for L2 Perp DEXes and app-specific rollups.
But don't forget to diversify and actively manage your positions (more on this in part 3).
Most importantly though, believe in your thesis.
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What came next · since 10 Nov 2023
Since then
Zero has written 32 more pieces on EigenLayer since this one.