Narrative is more important than technology. Why it’s time for altcoins

We are all speculators. Every moment of our existence in this universe is filled with uncertainty. Our brains are constantly constructing probability maps of our environment as we attempt to navigate our unpredictable existence. We act not based on facts but on the perceived probabilities of various outcomes.

A simple example that applies to my existence is the risk of triggering an avalanche while skiing. The most enjoyable powder runs in the backcountry are on slopes between 35° and 40°. This is also the perfect gradient for an avalanche. Before heading out, my guides assess the likelihood of an avalanche based on observed snow and weather conditions. My guides also rely on recent observations from other guides skiing in the same area. If the risk is too high, we don’t ski.

A more common example is taking the elevator versus taking the stairs. The former is faster than the latter. However, elevators are mechanical devices that sometimes break down, and a breakdown can result in serious injury or death. Given your beliefs about the likelihood of injury or death, you assess the expected value of the time and effort saved by taking the elevator up 30 floors versus taking the stairs (probability * outcome), whether you realize it or not. This is a less risky way to travel, but it takes longer and is more tiring.

You are gambling with your life every second of every day. This is not a bad thing; it is just the nature of human beings to be unable to perfectly predict the future. If we knew exactly how the future would turn out, what a terrifying existence it would be. I prefer our imperfections.

The narratives you tell yourself about certain behaviors inform your perception of their risk. I call them narratives. For social creatures like humans, narratives are created primarily through the “wisdom” of the group. For better or worse, the most influential narratives are the ones that everyone believes.

Narratives are also created from objective facts. In most cases, facts are discrete events that show that certain actions are risky. It is a fact that avalanches are more common on 40° slopes. It is a fact that people get hurt or killed while riding an elevator.

Common chit-chat and objective facts combine to create the narrative. While the facts are clear, as an individual, it is challenging to understand the exact number of lift deaths compared to the total number of lift rides. It is also challenging to understand the number of skiers who died in avalanches on a 40° slope compared to the total number of ski runs on a similar slope. In cases where we cannot ensure the actuarial data is accurate, we rely on others.

Here's the thing.

Avalanches :

I know that this type of avalanche is more common. But my guide has extensive experience and training in how to determine which slopes are prone to avalanches, and he believes this particular route is safe. Safe does not mean that avalanches will not occur; safe means that the probability of an avalanche occurring is acceptably low. So, because of my trust in his training system, which has evolved from the experience of thousands of mountain guides, I will follow him down this slope.

elevator:

I know that taking the elevator is more dangerous than taking the stairs. But everyone else is taking the elevator. If everyone else is taking the elevator, then it must be safe. Everyone can’t be wrong at the same time. Also, there are building codes that were created using the experience of trained engineers, and the elevator is certified safe. So, trusting in the expertise of engineers I’ve never met and the wisdom of the crowd, I feel safe when I take the elevator.

The way we assign probabilities depends not on facts or technology but on our beliefs about the facts and about how good the technology is. These beliefs are based on what other people say about the facts or good technology, and we think they know more than we do because of their training and experience.

Cryptocurrency:

To relate this to crypto, think about this. Let’s say a new project claims to solve a problem using new technology. The problem they claim to solve is well known, and the tokens of other projects that have attempted to solve it are also highly valued. You believe that the engineers on this project are smart and talented enough to solve this problem. You believe this because they are being advised by other engineers who have already launched successful crypto projects. You also have confidence in the team because they graduated from a prestigious tech university and have experience working at successful tech companies. Because the narrative is strong (narrative + technology), you invest. But digging deeper into your thought process, which is more important: the narrative or the technology?

Narrative. Narrative is more important than technology. Your perceived probability of success is based on how others think about the problem and how others think about the technical capabilities of your team. In rare cases, you have the ability to evaluate technology at only a basic level. That’s why you trust people who you believe are more knowledgeable than you to indicate whether the technology has a high probability of solving the problem.

While your technical skills are usually not enough to properly evaluate a project, you can easily tell whether a narrative is good or bad. A good narrative is one that more and more people are telling each other. Of course, it’s great if this narrative is told in a positive way. For example, “In this cycle, all retail traders will move from CEX to DEX.” But even if the narrative is negative: “It’s impossible for retail traders to leave CEX and move to DEX.”, the narrative of volume migrating from CEX to DEX still spreads. I don’t care if people believe this narrative; I don’t care. I just want them to tell a positive or negative variation of it. Because there is more money to be made going long than going short, optimism will win over pessimism during the cycle. That’s how the human brain is wired.

What is my job?

While my official title is Chief Investment Officer at Maelstrom, I should change it to Chief Narrative Officer. I tell narratives. The better and more concise the narrative, the faster it spreads. The more viral the narrative, the more the tokens associated with that narrative will appreciate in value.

Technology is not important!

Maelstrom’s finance professionals all graduated from the Wharton School of the University of Pennsylvania with a degree in finance. I didn’t plan it this way; it just happened. While we understand the potential applications of cryptography and blockchain technology, we are not cryptographers, distributed network experts, or have deep computer science knowledge. When we do deals, we outsource our technical due diligence to others who have those skills.

Others might be leading VCs or qualified angel investors from pre-sale token rounds. Some might be well-respected technical advisors to the project. In the absence of these types of validators, we might be content with the technology because the founders have launched successful projects, and success means applications that many crypto projects have used in the past.

Our job is to identify which projects in a vertical are most likely to succeed. Success depends on widely disseminated macro and micro narratives. You can make the most money by attaching tokens to narratives that go from being considered “never” to “maybe”.

I would rather invest in a token with a 0.01% perceived probability of success where the narrative is in the viral growth stage than a token with a 50% perceived probability of success where the narrative has reached the common sense stage. If the probability of success goes from 0.01% to 1% because the narrative quickly infects a lot of people, my money will increase 100x. However, the only way to multiply my money 100x with a token with a 50% perceived probability of success is if the actual results, in any form associated with the project, are so amazing that the growth comes from the observed results, not the rising perception of future success.

The macro narrative tells of an observed trend and how the project will capitalize on it. This is less of a trend than a narrative, as we are taking a small move and extrapolating its impact further into the uncertain future. Macro narrative: “Retail derivatives volumes are shifting from CEXs to DEXs.” BitPerp is building a perpetual (perp) exchange DEX. BitPerp’s token will rise because its macro narrative is currently unknown but has viral potential to infect many minds.

The micro-narrative explains why this particular project will be the best project out of all the competitors in a particular macro-narrative. Micro-narrative: “BitPerp was advised by Arthur Hayes, who helped invent perpetual contracts.” When others hear that Arthur is involved, they assume that the project is getting some great advice to help them surpass all other competing projects.

This blog is usually about macro narratives. Most of the time, I tell narratives about theft by central bankers and politicians who are destroying the value of time and human labor by printing fiat currencies. The narrative I tell is about how Bitcoin and the crypto ecosystem are the antidote to this organized theft of human dignity. But given that I run a trading book, I also tell micro narratives about crypto trends and how the price of my chosen coins and tokens will rise as more people believe and hear the narrative.

I don’t often go into depth on specific coins other than Bitcoin and Ethereum, but, it’s a bull market, people. I’ve laid the foundation for the important forces driving cryptocurrency usage and popularity, and it’s time to tout my portfolio.

result

Do results, by which I mean growth in transaction volume, total value locked, number of unique wallets, etc., matter? Yes, they do, but they have different importance to the token price depending on which part of the hype lifecycle you are investing in.

When investing in a narrative/trend that you think will go from “never” to “maybe”, the importance of project traction is low. The market doesn’t expect much because the market believes the token is part of a trend that is unlikely to grow in the future. Therefore, even mediocre results are considered groundbreaking because expectations are so low.

When investing in a narrative/trend that you think will go from “maybe” to “definitely”, the attractiveness of the project is very important. Market expectations are high because they believe in a bright future. Results that were considered exciting in the previous phase are considered mediocre in this phase. Amazing results are not enough; more is needed. A project must be truly revolutionary in this phase to meet expectations.

Altcoin narrative time

The purpose of this article and thought exercise is to give readers an understanding of the conceptual framework that guides Maelstrom. Over the next few months, most of the articles I write will focus on specific tokens we hold and their macro and micro narratives. These tokens have launched or are about to launch publicly, so I try to spread this narrative widely. I don’t care if you buy or sell any of the tokens mentioned. I care that I present such a provocative narrative and support your argument with others discussing it in a positive or negative way.

I know I’ve succeeded when I read the following on social media:

“Have you read Arthur’s latest post? Gee, this guy is a big jerk. There’s no way Pendle is going to overtake Binance as the largest derivatives exchange in crypto. I don’t even know what an interest rate swap is, and neither do the rest of the decentralized finance enthusiasts (degens) in crypto.”

or:

“Have you read Arthur’s latest article? We don’t hold enough Ethena. Tether is definitely not going to work, and Ethena will definitely become the top dollar-pegged stablecoin.”

Here’s the general idea of ​​the macro and micro narratives I plan to tell over the coming months.

Retail derivatives trading volume will shift from centralized exchanges to decentralized exchanges.

• Related projects: dYdX, GMX, and another possible competitor.

The launch of ETH staking will trigger a surge in interest rate swap volumes across DeFi.

• Related project: Pendle.
  

There is a way to leverage tens of billions of dollars worth of low-market cap shitcoins to drive DEX quanto derivatives volumes.

• Related Project: Krav.

DEX on-chain liquidity will be provided by middleware that disengages current market making firms.

• Related project: Elixir.

As DEXs become the primary venue for price discovery, on-chain oracles that provide settlement and clearing prices will become increasingly important.

• Related project: Flare.

Why would Tether and any stablecoin be under pressure to use TradFi Bank to custody fiat, when we can create a stablecoin pegged to fiat without relying on TradFi.

• Related project: Ethena.

How to solve cross-chain bridging of assets without building a bridge.

• Related project: Axelar.

in conclusion

Right now, attention is focused on the staggering amount of Bitcoin that is being accumulated by US-listed spot ETFs. This, along with the global fiat debasement spree, will drive Bitcoin to unfathomable heights in fiat terms. The upcoming US-listed Ethereum ETF will also drive Ethereum prices higher. I own Bitcoin and Ethereum. I may buy a little more, but overall, my attention is turning to altcoins.

What tokens can I buy that outperform Bitcoin, followed by Ethereum? This is Maelstrom’s minimum hurdle rate. We achieve this by learning as much as possible about certain projects and telling great narratives.