BitMEX exchange founder Arthur Hayes believes that in the cryptocurrency industry, “narrative” is more important than “technology,” and he also mentions that his attention has been taken away by altcoins. This article is sourced from Arthur Hayes’ article “Chief Story Officer,” compiled, translated, and written by Foresight News.
Table of Contents:
Avalanches:
Elevators:
Cryptocurrencies:
What is my job?
Results
Narrative Time for Altcoins
Conclusion
We are all speculators. Every moment of our existence in this universe is filled with uncertainty. As we navigate the unpredictable nature of our existence, our brains continuously construct a probability map of our environment. Our actions are not based on facts, but on 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 backcountry powder runs are on slopes with grades between 35° and 40°. This is also the perfect gradient for avalanches. Before heading out, my guide assesses the likelihood of an avalanche based on observed snowfall and weather conditions. My guide also relies on recent observations from other guides who have been skiing in the same area. If the risk is too high, we don’t ski.
A more common example is choosing between taking the elevator or the stairs. The former is faster than the latter. However, elevators are mechanical devices that sometimes malfunction, and these malfunctions can result in serious injury or death. Considering your belief in the likelihood of getting injured or dying, you evaluate the expected value (probability * outcome) of time and energy saved by taking the elevator up 30 floors compared to taking the stairs, which is a less risky mode of travel but takes longer and is more tiring.
Every second of every day, you are gambling with your life. This is not a bad thing; it is simply the nature of being human and unable to perfectly predict the future. How terrifying would existence be if we knew exactly how things would unfold? I prefer our imperfections.
The narratives you tell yourself about certain behaviors inform your perception of their risks. I call this narrative. For social creatures like humans, narratives are primarily created through the “wisdom” of the crowd. The most influential narratives are the ones that everyone believes.
Narratives are also created from objective facts. In most cases, the facts indicate discrete events where certain behaviors carry risks. Indeed, avalanches are more common on slopes with a 40° grade. It is a fact that people get injured or die while riding elevators.
Common chatter combines with objective facts to create narratives. While the facts may be clear, it is challenging as an individual to understand the exact ratio of deaths in elevators to the total number of elevator rides. It is also challenging to grasp the number of skiers who die in avalanches on 40° slopes compared to the total number of runs on similar slopes. In situations where we cannot ensure the accuracy of actuarial data, we rely on others.
Here’s how it goes.
I know this type of avalanche is more common. But my guide, with his experience and training in assessing which slopes are prone to avalanches, believes this particular line is safe. Safe does not mean that an avalanche will not occur; safe means that the probability of an avalanche occurring is low enough to be acceptable. So, trusting his training system, which has evolved from the experiences of thousands of mountaineering guides, I follow him down this slope.
I know that riding an elevator is more dangerous than taking the stairs. But everyone else is taking the elevator. If everyone else is riding the elevator, then it must be safe. Everyone cannot be wrong at the same time. Additionally, there are building codes established by trained engineers and safety certifications for elevators. So, trusting the expertise of engineers I have never met and the wisdom of the crowd, I feel safe riding the elevator.
The way we assign probabilities does not depend on facts or technology, but on our perception of facts and the quality of technology. These perceptions are based on what others say about the facts or the quality of the technology, which we believe they know more about due to their training and experience.
To relate this to cryptocurrencies, consider the following. Suppose a new project claims to solve a problem using new technology. The problem they claim to solve is well-known, and tokens from other projects attempting to solve the same problem are highly valued. You believe that the engineers behind this project are smart and talented enough to solve this problem. You believe this because engineers from successful crypto projects that have already launched are advising them. You have confidence in the team because they graduated from prestigious tech universities and have experience working at successful tech companies. Because the narrative is strong (narrative + technology), you invest. But when you dig deeper into your thought process, which is more important: narrative or technology?
Narrative. Narrative is more important than technology. Your perceived probability of success is based on others’ opinions of the problem and others’ opinions of the team’s technical capabilities. In very few cases, you have the ability to evaluate the technology on a fundamental level. That’s why you trust those whom you believe are more knowledgeable than yourself to indicate whether the technology is likely to solve the problem.
While your technical skills are often insufficient to accurately evaluate a project, you can easily understand the quality of a narrative. A good narrative is one that more and more people are telling each other. Of course, it’s even better if the narrative is told in a positive way. For example, “In this cycle, all retail traders will shift from CEX to DEX.” But even if the narrative is negative, like “Retail traders will never leave CEX for DEX,” the narrative of volume shifting from CEX to DEX is still spreading. I don’t care if people believe the narrative; I don’t care. I just want them to say it in its positive or negative variations. Because going long makes more money than going short, optimism will prevail over pessimism in the cycle. That’s how the human brain is wired.
Although my formal title is Chief Investment Officer of Maelstrom, I should change it to Chief Story Officer. I tell stories. The better and more concise the narrative, the faster it spreads. The more the narrative spreads, the more the associated tokens appreciate.
The financial professionals at Maelstrom are all graduates of the Wharton School at the University of Pennsylvania, with degrees in finance. I did not intend it that way; it just happened. While we understand the potential applications of cryptography and blockchain technology, we are not cryptographers, distributed network experts, nor do we have deep computer science backgrounds. We are a hodgepodge of finance professionals who have stumbled into this space.Science Knowledge
When we engage in transactions, we may outsource the technical due diligence to others who possess these skills. These individuals may be leading venture capital firms or qualified angel investors in pre-sale token rounds. Some may be respected technical advisors to the project. Without validators of this type, we may be satisfied with the technology because the founders have launched successful projects, and success means applications that have been used by many past crypto projects.
Our job is to identify which projects are most likely to succeed in a vertical direction. Success depends on the widespread dissemination of macro and micro narratives. You can earn the most money by attaching tokens to narratives that are perceived to have a 0.01% chance of success and are in the viral growth stage. I would rather invest in tokens with a perceived success probability of 0.01% and a narrative in the viral growth stage than tokens with a perceived success probability of 50% but a narrative that has reached the stage of common sense. If the probability of success increases from 0.01% to 1% because the narrative has quickly infected many people, my money will increase 100 times. However, the only way to double my money with tokens that have a perceived success probability of 50% is if the actual results, in any form related to the project, are so amazing that growth comes from observed results rather than continuously rising expectations of future success.
Macro narratives tell the observed trends and how the project will leverage them. This is more of a narrative than a trend, as we are taking a small action and extrapolating its impact into an uncertain future. Macro narrative: “Retail derivative trading volume is shifting from CEX to DEX.” BitPerp is building a perpetual (perp) exchange DEX. BitPerp’s token will rise because its macro narrative is currently unknown but has the potential to infect many people’s minds.
Micro narratives explain why this particular project will be the best among all competitors in a specific macro narrative. Micro narrative: “BitPerp has received advice from Arthur Hayes, who helped invent perpetual contracts.” When others hear that Arthur is involved, they believe the project will receive 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 central bank governors and politicians who destroy the value of time and labor by printing fiat currency. The narrative I tell is about how Bitcoin and the crypto ecosystem become an antidote to this organized theft of human dignity. However, since I run a trading book, I also tell micro narratives about crypto trends and how the prices of the coins and tokens I choose will rise as more people believe in and hear the narratives.
I don’t often analyze specific tokens other than Bitcoin and Ethereum, but it’s a bull market, folks. I have laid the foundation for a significant force driving the adoption and popularization of cryptocurrencies, and it’s time to tout my investment portfolio.
In the end, by growth, I mean the growth of metrics such as trading volume, total locked value, and unique wallet count. Are they important? Yes, they are important, but their importance to token prices varies depending on which part of the speculative life cycle you are investing in.
When investing in a narrative/trend that you believe will go from “never” to “possibly” happening, the attractiveness of the project is low. The market has low expectations because it sees the token as part of a trend that is unlikely to grow in the future. Therefore, even mediocre results would be seen as groundbreaking because expectations are too low.
When investing in a narrative/trend that you believe will go from “maybe” to “definitely” happening, the attractiveness of the project is very important. The market has high expectations because it believes in a bright future. Results that were previously considered exciting are now seen as mediocre in this stage. Astonishing results are not enough; more effort is needed. At this stage, a project must have real revolutionary qualities to meet expectations.
The purpose of this article and the thought exercise is to help readers understand the concept framework guiding Maelstrom. In the coming months, most of the articles I write will focus on specific tokens we hold and their macro and micro narratives. These tokens have already been launched or are about to be publicly issued, so I am trying to widely disseminate these narratives. I don’t care if you buy or sell any of the mentioned tokens. What I care about is that I present such a provocative narrative and support your discussion of it with others in a positive or negative way.
When I read the following content on social media, I know I have succeeded:
Or:
Here is an outline of the macro and micro narratives I plan to tell in the next few months.
Retail derivative trading volume will shift from centralized exchanges to decentralized exchanges.
Related projects: dYdX, GMX, and possibly another competitor.
The launch of ETH staking will trigger a surge in the volume of DeFi interest rate swaps.
Related project: Pendle.
There is a way to drive DEX dual-currency derivative trading volume using low market cap junk coins worth billions.
Related project: Krav.
On-chain liquidity for DEX will be provided by middleware, which will disconnect the current market makers.
Related project: Elixir.
As DEX becomes the primary venue for price discovery, on-chain oracles providing settlement and clearing prices will become increasingly important.
Related project: Flare.
Why Tether and any stablecoin using TradFi banks to custody fiat currency will face pressure, and how we can create fiat-collateralized stablecoins without relying on TradFi.
Related project: Ethena.
How to solve asset cross-chain bridging without building bridges.
Related project: Axelar.
Currently, people’s attention is focused on the astounding amount of Bitcoin accumulated by the US-listed spot ETF. This, along with the global fiat currency devaluation spree, will drive Bitcoin to unimaginable heights when measured against fiat currency. The upcoming listing of Ethereum ETF in the US will also boost the price of Ethereum. I have Bitcoin and Ethereum. I may buy a little more, but overall, my attention is shifting to altcoins.
Which tokens can I buy that outperform Bitcoin and then Ethereum? This is the minimum threshold for Maelstrom. We achieve this goal by understanding certain projects as much as possible and telling exciting narratives about them.