When there is little form of value to illustrate in terms of users, revenue, or any other numerical means, all that is left is a conversation or in other words, telling a story.
Storytelling can drive assets to ridiculous valuations in the billions or even tens of billions.
Narratives are the reason Tesla, Dogecoin, and many other companies have made a good living, with valuations far beyond what any numbers-based reasonable valuation could justify.
Of course, excess liquidity in the capital market has also raised valuations.
But some assets stand out from the crowd and reach surprising heights.
These assets are backed by a strong narrative.
Today, since it’s raining, I’m going to give you a deep dive into narrative and how building a narrative for your own investments can make you a better investor.
Narratives can capture the minds of millions
We have moved far beyond the world of access to information. Today, everyone bombards us with information. Words, pictures, sounds and videos jump out of our screens, grab our heads and demand our attention.
Too often, we willingly give up our attention. After all, we have neither the time nor the mental capacity to critically think about every piece of information we take in. Storytelling helps us make sense of the complex, fast-paced world around us.
This also means that people in today’s world make split-second decisions based on bits of information.
We have no interest in getting into politics at DeFi Ed, but they are a perfect example of a really powerful narrative.
Narratives are what bring people to the polls or to the streets with picket signs.
A fair society must also be seen as a fair society. If the narrative of a highly unfair society reaches a boiling point, it could have disastrous consequences.
While statistics and numbers should be important, people respond more strongly to emotions.
Therefore, rational actors must also consider the behavior of irrational actors.
Investment narrative
Believe it or not, even in the institutional investing world, a lot of investing involves narrative.
When you put together an investment memo internally for your fund, there has to be a narrative behind the investment to some extent if you want the fund to invest.
No one is going to invest millions or billions of dollars in a company based on the numbers in a DCF model.
You have to develop a story around the company and its future.
For example, think of Ethereum.
Founded in 2015 by teenage genius Vitalik Buterin, Ethereum is the world's first smart contract platform. Anyone, anywhere, at any time can access and build on the Ethereum network without permission or even having to prove their identity. Ethereum keeps a permanent record of all activity on its chain. As the largest, most decentralized, and most used smart contract platform, Ethereum will become the foundational layer for the future of the Internet and the entire financial system by eliminating the rent-seeking middlemen that invade our privacy and hold our assets.
It’s a powerful narrative.
Let’s unpack the anatomy of the Ethereum narrative. The important components are:
product
Its history
Inspiring Leadership
The markets it operates in
Competitive Positioning
A bold vision for the future
Can you see all the parts in the paragraph above about Ethereum?
A narrative-first investing approach will then assess these components and tie them to observable metrics.
Ethereum has the largest number of developers and validators. It is also home to almost all innovative applications in Crypto that are truly adopted and have huge network effects, giving it a competitive advantage over other smart contract platforms.
Now, you can look at narratives like the developer ecosystem and activity in DeFi or NFTs.
Narrative transcends reality
Crypto assets, in particular, tend to be severely overvalued.
When analyzing our own investment narratives, we distinguish between what is possible and what is not.
Last year’s OlympusDAO is a great example of this.
The "decentralized reserve currency" narrative is extremely unlikely, yet people are calling for a $100 billion market cap. If you've calculated their OHM issuance rate the constant buying pressure needed to sustain such levels, then the numbers are astronomical. All they have are treasury assets and community attention. A more realistic narrative is how they use the assets they have to build a sustainable protocol in the crypto market.
Think critically about which narratives are likely or unlikely, and when things are overheated, you sell, and when things are oversold, you buy.
In DeFi education, look at everything holistically. I learned that focusing too much on the narrative means you have blind spots. Focusing too much on the data means you miss opportunities. Being too analytical slows you down. Being too lax increases your risk.
Finding the right balance takes time.
