The rise and fall of crypto narratives
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In 1935, scientists wrote an article called “The EPR Paradox” which described the strange situation of quantum superpositions, in which systems can exist in multiple states corresponding to different outcomes simultaneously. In effect, the paper argued that there wasn’t only one but in fact multiple “true” realities. Each of these realities would remain valid until they were interacted with or observed by the external world. At that time, the superposition collapses into one of the possible states.
To better visualize this idea, Austrian physicist Erwin Schrödinger proposed a thought experiment that would eventually become ingrained in our culture. Imagine a cat in a box with a flask of poison, a radioactive material, and a monitor that will smash the flask and release the poison if a single atom decays. After a while, quantum theory dictates that the cat is simultaneously dead and alive at the same time. It is only once we open the box to observe the cat to be either dead or alive that the multiple states cease to be simultaneously true. It is our actions that determine, ultimately, which reality prevails.
(The above and below section was largely borrowed from @nlw’s article titled “Schrödinger’s Securities: Regulation & The Quantum State Of Crypto”)
Nobody can know everything. The complexity of society is irreducible. We cling to mental models that satisfy our thirst for understanding a given phenomenon, and stick to groups who identify with similar narratives.
Beliefs are not only shaped by reality; narratives define it. In any social arena, there’s a never-ending battle to tell what’s happening, why is it happening, and what is happening next. Controlling narratives is particularly powerful. These narratives constitute the fabric of the world around us: government, religion, culture, and finance all exist simply because we believe in it (and provides value for those who believe in it).
Investors invest in or against narratives; builders build directionally towards narratives; commentators race to associate themselves with the dominant narratives or, alternatively, to be the contrarian positioning against the conventional wisdom.
Market narratives are marketing. The incentives to push a narrative can be financial, like an investor sharing a view of the world that would just so happen to benefit them if more people were to agree with them and invest accordingly. In this way, narratives are attempts at self-fulfilling prophecy. Incentives can also be even simpler, however, such as the desire for status and community relevance.
The fact that narratives are marketing is not a bad or malicious thing. Indeed, there is value in an emerging industry enabling a space where people can discuss narratives they see trending.
This is especially true in the crypto space, in which content from investors and builders today has an outsized influence on market sentiment relative to neutral third-party research firms or data-driven journalism. Again, this is not in and of itself a problem. It is a good thing to get live insights into how operators see things. Moreover, the independent, data-driven research/journalist side of the market is catching up quickly which is accelerating the critical analysis of these narratives.
Cambrian Explosion of Crypto Narratives
During the Cambrian explosion more than half a billion years ago, the variety of life on Earth burgeoned dramatically. While most species that came about eventually went extinct in a series of mass extinction events, we still have this relatively short period of profligate experimentation to thank for the variety of life we experience around us now. In other words, the truly bizarre creatures that roamed the planet then were side-effects of Nature showing off its capacity for variegated expression of lifeforms, before settling into a somewhat more sensible pattern.
In an analogous vein, the dotcom bubble was an extinction event that wiped out exuberant companies, but fundamentally sound ideas survived, a large variety of which are to be found today (ex: Amazon).
In the crypto world, we have WhopperCoins, Putincoins, Bitcoin Cash, Bitconnect, and a string of other tokens/cryptocurrencies that were created during the last bubble. In the long-run, many shall die out — much like the numerous species that kicked the bucket at the end of the Cambrian explosion. Only the fittest shall survive.
“Jostling for narratives can be seen as an evolutionary battle to compose the doctrines most likely to attract the next wave of adherents. Coin prices amplify this mess. Market cycles–especially up-cycles–appear to pick winning narratives, leading to sudden increases in evangelism and waves of new adherents. And when the market swings the other way, a new narrative gains steam and steals adherents.” — Tony Sheng
Which crypto narratives are gaining steam tomorrow? How will that change next month or year (or 10)? What are prospective catalysts that could change the dominant narratives of today? How does this differ globally?
Bitcoin and Ethereum, the two most popular cryptocurrencies, have had many narratives fade in and out of popularity over the years. In the below sections are two charts which visualize the ebb and flow of these different narratives for both cryptocurrencies.
Before you read further, I must note an important differentiation. Bitcoin’s narrative of SoV/Gold 2.0 was present from day one, has Protocol Market Fit (PMF), has held off competing narratives, has been delivered on, and remains the dominant narrative today. There is persistence of the original intent.
While the Ethereum community has endorsed radical changes/pivots, trying to find narrative fit (PMF), even so far as to recently claim a SoV narrative. The Ethereum leadership team is more willing to embrace alternations to the core objective of the protocol in their search for PMF (world computer, dapps, crowdfunding, nonfungibles, open finance, radical markets).
Only the antifragile narratives will survive
When something is “antifragile” it gains strength as a result of volatility, stressors, or shocks (originally coined by Nassim Nicholas Taleb)
“Every criticism Bitcoin survives makes it stronger.” — Jimmy Song
Crypto-communities seek for newish narratives or adapt current ones as an exercise of collective strengthening. They also do so to combat critique by isolating some of its premises. Since there is no objectively correct monetary premium, promoting the superior attributes of a monetary good is more effective than for regular goods, whose value is ultimately anchored to cash flow or use-demand. The religious fervor of participants in the Bitcoin market can be observed in various online forums where owners actively promote the benefits of Bitcoin and the wealth that can be made by investing in it. In observing the Bitcoin market, Leigh Drogen comments:
“You recognize this as a religion — a story we all tell each other and agree upon. Religion is the adoption curve we ought to be thinking about. It’s almost perfect — as soon as someone gets in, they tell everyone and go out evangelizing. Then their friends get in and they start evangelizing.
While the comparison to religion may give Bitcoin an aura of irrational faith, it is entirely rational for the individual owner to evangelize for a superior monetary good and for society as a whole to standardize on it. Money acts as the foundation for all trade and savings, so the adoption of a superior form of money has tremendous multiplicative benefits to wealth creation for all members of a society.”
Fiat currency, similarly, is faith based. Per wikipedia:
“Fiat money is a currency without intrinsic value that has been established as money, often by government regulation. Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value.”
US dollars reinforce the faith with “In God We Trust”
“Gold’s simplicity is a great feature. But Bitcoin is likewise the simplest cryptocurrency. You can explain the intuitions behind Bitcoin to any captive high schooler who has a basic grasp of probability and a moderate attention span. To the digital native of the future, Bitcoin wallets will probably seem more natural than vaults full of useless metals painstakingly drilled out of the earth.” — Haseeb Qureshi
“Stable ideologies allow communities to thrive. A simple example in religion is the Christian tenet that “there is one true god”. This belief strengthens the religion because it weakens membership in competing religions. Communities with unstable ideologies will eventually collapse. The very ideology that justifies the existence of Bitcoin Cash, also justifies the use of chain splits to settle any disagreements within the community. It’s easy to see that this ideology, that a hard forked minority chain can be a legitimate successor to the original chain, is completely unstable. It is thus reasonable to conclude that Bitcoin Cash will face a never-ending threat where its community members threaten to split off permanently from the main chain.” — Kay Kurokawa
This was prophetic. Due to fragmented ideology, Bitcoin Cash (also known as the altcoin “bcash”) ultimately split into two chains late last year and the price collapsed.
Wave Function Collapse
In quantum mechanics, “wave function collapse” occurs when the superposition of several states appears to reduce to a single state due to interaction with the external world; this is called an “observation.” Narratives can persist in the multiple states for quite some time, until the moment when it comes under critical observation.
Narrative wave function collapses only when we believe that everyone else believes the critical observation (common knowledge). That’s what changes behavior. And when that transition to common knowledge happens, behavior changes fast.
The classic example of this is the fable of The Emperor’s New Clothes. Two weavers who promise an emperor a new suit of clothes that they say is invisible to those who are unfit for their positions, stupid, or incompetent — while in reality, they make no clothes at all, making everyone believe the clothes are invisible to them. When the emperor parades before his subjects in his new “clothes”, no one dares to say that they do not see any suit of clothes on him for fear that they will be seen as stupid. The only thing that changes behavior is when the little girl announces the Emperor’s nudity loudly enough so that the entire crowd believes that everyone else in the crowd heard the news. That’s when behavior changes. There’s a lot of ubiquitous private information about powerful ideas trapped in the crowd today, just waiting for a someone to release it as common knowledge. — Ben Hunt
What we are observing now in the crypto bear market is the collapse of the narrative wave function from critical observations making knowledge common, ultimately manifested as price.
Some narratives are unraveling. Narratives that conflict will reconcile (ex: utility vs SoV theory of money). Which ones will remain? Which ones will survive? As we’ve seen in previous crypto market cycles, only the most antifragile will endure.