In the later stages of the market, the sentiment becomes increasingly important. The newbies who flock into the blockchain space can’t tell bad projects from good by doing research. Hence, they fall for stories propelled by marketing and social media.

Understanding the development of narratives is crucial. I call this being “culturally acquainted” with the subject matter—a highly desirable soft skill in crypto investing. If you can anticipate the advent of a new hot topic like DeFi or gaming, you will be ahead of the pack. Today, I’ll explain why sentiment can be as useful as fundamentals and how to put it to work.

In 1989, evolutionary biologist Richard Dawkins coined the term ‘meme’, defining it as a unit of cultural transmission or a unit of imitation and replication. Memes are discrete units of culture that spread through replication and, like genes, differ in their degree of fitness or ability to adapt to the social environment in which they propagate.

Dawkins’ thesis on memes is based on the older social contagion theory, which postulates that sociocultural phenomena like affect, attitudes, beliefs, and behavior spread through populations like infections. It views cultural traits as analogous to mind viruses or thought contagions, propagating from one mind to another through mimicry or communication.

This whole theory of memetics is grounded in the assumption that people don’t have ideas, but rather that ideas have people. This notion lies at the basis of any sound market analysis.

Investing and analyzing markets requires higher-order thinking. The game theory behind it is akin to participating in a Keynesian beauty contest. You’re not supposed to bet on an asset because of your beliefs, but based on what you believe others think about its valuation.

This higher-order thinking requires a solid understanding of developing memes and narratives and giving up on the idea that there’s some truth underlying any investing thesis. Revenues, P/E ratios, NAV, DCF, intrinsic values, margins of safety, these are all memes. Stories we tell to justify our actions before ourselves and others.

Narratives make markets

Traditional investors love to say that the stock market has “decoupled from reality,” but this is a misnomer. The market is the reality, by definition. What has really happened is that the market has decoupled, whether temporarily or permanently, from the old narratives these people used to model and price it.

A more revealing way to think about investing then is to consider it as betting on narratives.

For example, right now I’m subscribing to “the flippening” narrative and betting that Ethereum will outperform Bitcoin over the long run. My thesis is simple, with the move to PoS, Ethereum has the rapidly propagating ESG narrative (especially popular with millennials, the same demographic most likely to invest in crypto) on its side. Plus, with the implementation of the fee burn mechanism, Ethereum is expected to become deflationary, essentially beating Bitcoin at its own game. Plus, it’s now a “productive asset”—a meme TradFi people resonate with.

At least, that’s the story. And while I don’t personally buy this story, I see myself quickly becoming a minority, and since narratives are reality and I don’t want to be decoupled from reality—I adapt and change with the times.

Because if you don’t, you’ll get rekt like Tesla shorters or sidelined like gold bugs did this whole bull run, and like I got with Layer 1s. I saw the multichain narrative develop before my own eyes, and yet I didn’t buy it. My smooth brain didn’t believe it, disregarded the most basic investing principles, and missed on some of the biggest gains of this cycle.

The moral of the story is, memes and narratives make or break markets, and you want to spot and act on them early—before they reach critical mass and become commonly accepted as truth.

To do this, you need to invest your time in becoming culturally acquainted with crypto. That means identifying and following the primary storytellers on Twitter and gauging the strength of the memes they propagate by tracking the sentiment of the relevant communities on Discord, Telegram, Reddit, and anywhere else you can think of.

And don’t be ashamed to overlook fundamentals in favor of memes.

I paper-handed OHM at a seven-digit market cap because I ignored the OlympusDAO community’s unprecedented conviction and the fitness of the “protocol owned liquidity” narrative. I immediately recognized that the community was extraordinary but couldn’t overcome my bias towards “fundamentals” and therefore had no confidence to withstand the volatility and HODL.

OHM market cap. Source: CoinGecko.

Final thoughts

There’s a legendary quote from Warren Buffet saying, “time in the market beats timing the market.” In crypto, things are a little bit different, and time in the market doesn’t necessarily mean staying invested but rather spending time understanding the market.

When you’re already invested in a project, you want to spend time understanding the memes and narratives surrounding it by becoming a part of the community. All that time scrolling crypto Twitter isn’t for nothing—you’re training your intuition to identify trends and spot developing narratives early.

Understanding the psychology that drives the market’s cyclical nature may just as well result in the highest ROI.If you are still not following Vinny, it’s time to fix that. Otherwise, you risk missing some alpha leaks. Speaking of alpha leaks, my colleagues: Anton Tarasov, Sergey Yakovenko, and Alexander Mardar also share them on our Twitter accounts.