Reflections on the crypto market’s painful period: Stop outsourcing market narratives to retail investors

Original author: Michael Dempsey

Original translation: Vernacular Blockchain

The crypto market is in an interesting phase right now. We are only 8-12 weeks from the peak of the market mania, but news continues to come in that the governments that crypto markets once complained about the most are now choosing to embrace the asset class and its technology. Yet despite this, the market has fallen into a kind of depression that I have not seen in a long time.

The old joke of developers, please do something now seems pale and powerless. Because developers have already taken action, they have chosen to free the market and remove many restrictions and attacks on the crypto field. Therefore, the future of this industry now, frankly speaking, depends entirely on us.

So, what happened? No one knows for sure, but here are some of my thoughts this morning.

1. Macro level

I’m not going to go into detail about the crypto market movements over the past few months, but I will say that it has been pretty interesting watching the psychology of the market shift and moderate between our president and the factors that influence the market.

https://x.com/mhdempsey/status/1878788617004548287

In 2024, many people made money on the so-called “Trump trade,” specifically, betting that the market underestimated the likelihood of a Trump victory and the policy changes that would come with it. However, it now appears that the Trump trade was overbought, both in the medium-term overall market and in the short-term crypto market. Trump’s election (and the weeks that followed) may have been a classic “sell on the good news” event, after all, Bitcoin soared from the $70,000 range to $106,000 after his victory, and then the market entered a correction phase. As with many things in the crypto market, the entire market once again ran ahead of reality.

I wont discuss the market too much here, but I recommend you follow Smac and read his recent articles on volatility, etc. Im probably a little more bearish than Smac in the medium term, but hes probably smarter than me, so I recommend you check out his views.

Now, let’s talk about something that’s not entirely about price.

2. Stop outsourcing market narratives to retail investors

Crypto Market Narrative Dune Dashboard

This may sound strange, but I think that the crypto market has largely outsourced speculation and narrative construction to the smallest players (individual investors) and those who stand at the edge of the risk curve. This has led to a chain reaction, where those speculators who may be unsophisticated and easily gullible have become the ones who lead the market narrative, and these narratives often spread in the echo chamber of the crypto industry (Crypto Twitter, trader group chats, the divergence between European and American markets and Asian markets, etc.), and finally it is the turn of institutions to participate. This phenomenon is further exacerbated by the fact that some institutions themselves have the same investment analysis methods as retail investors.

These narratives have driven large fluctuations in market prices and absorbed a large amount of capital, especially in the absence of new market participants. Fund rotation is almost calculated on a weekly basis, and tokens have experienced a crazy rise and then plummeted by more than 80%. This market dynamic can neither support long-term investment, nor attract new funds to flow into the crypto market (except BTC), nor promote long-term industry construction.

I think what really needs to be done is for project owners to think more forward-lookingly about how to position their products in the crypto space. In other words, project owners should proactively create new narratives rather than passively cater to existing narratives.

Some people may think that the only important thing in the crypto market is gambling – exchanging a token in the hope of making more money. But even within this framework, different narratives can still be constructed around this core logic.

Typically, the largest projects (L1 and L2) follow certain market narratives, hoping to drive long-term development through short-term TVL growth. However, the problem is that large projects adjust much slower than small projects, so when they finally turn to a narrative, the narrative is often dead. We recently saw an example of the AI narrative, where TAO captured most of the value in the early stages and successfully shaped the narrative, while the subsequent entry of small GPT shell projects weakened the influence of this narrative.

We see this in other “X + encryption” concepts, such as:

• NFT (Art + Crypto)

• Investing in DAO (Investment Fund + Crypto)

• RWA (Traditional Finance + Crypto)

• OHM (idiot + encryption)

Recently, we have seen the rise of Memecoin on a larger scale (“cultural” speculation + crypto, or narrative metagame + crypto). We are likely to continue to witness similar cycles in the future.

All crypto projects ultimately hope to build a core user group (what we usually call a community) that is aligned with the project in both ideology and economic interests. Based on this, if you are building a project, your goal should be to create a propaganda agency that can spread the narrative in the early stages. As an organization, foundation, or a small group with funds and influence far beyond retail investors (after all, you have issued coins or raised funds), your task is to create a narrative that you truly believe in and promote to the market why this narrative is important and why your project can dominate it. Rather than trying to get a piece of an existing narrative that already has market recognition. Competition is a losers game, and competing for existing narratives is particularly difficult.

Bet on the future you believe in and become the Schelling Point Protocol for that future.

3. Power Law Compounders

As an investor in everything from venture capital to crypto to public market equities, Ive found that the consensus on different markets is extremely different. Many people like to compare public markets to crypto, but there is a core misunderstanding that actually reveals whats wrong with crypto today – and why some people (maybe just me) are disappointed.

Over the past 5 to 15 years, public market investors have gradually discovered the concept of long-term compounding ROI at the company level, especially large companies that will become larger than anyone expected and accumulate value far beyond market perception. These companies usually have multiple characteristics, such as being able to take full advantage of the changing waves of technology and having a broad vision from the beginning. This investment logic means that compared to investing in companies that fluctuate violently and may soar but may also retrace more than 80%, investing in high-quality companies that can achieve long-term stable growth and relatively controllable retracements is a better choice.

In the public markets, this trend has made it more difficult for hedge funds to survive. The Mag 7 (Microsoft, Apple, Google, Amazon, Meta, Tesla, Nvidia) and a number of companies with compound growth characteristics have created huge upward momentum in the core index, making it difficult for hedge funds to outperform the market without taking higher risks. As a result, many fund managers have begun to turn to long-term concentrated investment strategies, usually allocating a certain proportion of Mag 7 stocks, while claiming to be able to achieve smaller drawdowns in a big bear market like 2022 (but the reality is that many fund managers still invested in speculative technology stocks and were eventually eliminated by the market).

1) The Compound Growth Dilemma of the Crypto Market

Hedge funds in the crypto market face similar challenges, especially Bitcoin. Bitcoin (in my opinion) has a very high risk/reward ratio and runs through multiple core narratives such as new currency, inflation-resistant asset, and crypto market index. Bitcoin often becomes the benchmark index for all liquid crypto asset strategies. Similar to hedge funds in the public market, many crypto hedge funds perform well in market up cycles, but essentially rely on leveraged long strategies, resulting in severe drawdowns when the market falls, and performance is far lower than Bitcoin in safe-haven years, ultimately leading to long-term underperformance of the market benchmark.

In the crypto market, there have been almost no real “compound growth” assets in the past, except for L1 public chains like ETH and SOL. This is because infrastructure projects are more likely to achieve long-term growth when expanding horizontally. However, some teams are now trying to break this limitation, but an unresolved question is: Can the existing Token economic model support this goal? In other words, in order to truly build a project with compound growth characteristics, should we build a company from scratch instead of launching Tokens too early? (This may also be an important reason why project parties should not issue Tokens too early.)

2) The future of compound growth projects

We have a lot of thoughts on this, but in any case, we think this market dynamic will change in the crypto space. Some founders are beginning to view their projects as potential compounding assets with a broader strategic vision than in past market cycles. This shift is expected to bring more rationality to the crypto market and establish a set of core benchmarks. Currently, the crypto market lacks a group of assets with good risk-adjusted returns, which forces market participants to choose highly speculative shitcoining and frequent fund rotation. If real compounding projects emerge, the market investment logic may change accordingly.

4. Conclusion

As Bitcoin and the entire market slowly fell from ~$95,000 to $80,000, I thought about how to build lasting value in crypto, with a somewhat ironic idealistic and even utopian view. This round of market pullback has been one of the most orderly sell-offs I have seen in recent times. However, when you witness an entire industry retreat from belief, I see this as an opportunity to build a new investment framework, shape a new narrative, and establish a unique fundamental perspective in the ruins after the market washes out low-conviction investors.

This article is sourced from the internet: Reflections on the crypto market’s painful period: Stop outsourcing market narratives to retail investors

Related: Solana Is Oversold, Price Recovery From $170 May Face Challenge

In Brief Solana’s price has dropped to $173, facing bearish sentiment and struggling to recover after falling from its ATH of $295. The RSI entered the oversold zone, indicating potential for a recovery, but Solana has struggled to show sharp rebounds, hindering its comeback. Solana faces resistance at $183; failure to breach this level could push it toward $161, while breaking $183 could signal a rally toward $201. promo var rnd = window.rnd || Math.floor(Math.random()*10e6); var pid588602 = window.pid588602 || rnd; var plc588602 = window.plc588602 || 0; var abkw = window.abkw || ”; var absrc = ‘https://servedbyadbutler.com/adserve/;ID=177750;size=0x0;setID=588602;type=js;sw=’+screen.width+’;sh=’+screen.height+’;spr=’+window.devicePixelRatio+’;kw=’+abkw+’;pid=’+pid588602+’;place=’+(plc588602++)+’;rnd=’+rnd+’;click=CLICK_MACRO_PLACEHOLDER’; document.write(”+’ipt>’); Solana’s price has faced significant challenges in recent months. After reaching its all-time high (ATH) of $295 in mid-January, the altcoin has seen a steady downtrend, now trading around $173.  Despite efforts…