Author: Arthur Hayes, Medium; Compiler: Deng Tong, Golden Finance
We are all speculators. Every moment of our existence in this universe is filled with uncertainty. As we attempt to navigate an unpredictable existence, our brains are constantly constructing probability maps of our environment. We base our actions not on facts but on the 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 powder runs in the backcountry are on slopes ranging from 35° to 40°. It's also the perfect gradient for avalanches. Before heading out, my guide would assess the likelihood of an avalanche based on observed snowfall and weather conditions. My guide also relied on recent observations from other guides skiing the same area. If the risk is too high, we don’t ski.
A more common example is taking the elevator or taking the stairs. The former is faster than the latter. However, elevators are mechanical devices that sometimes malfunction, and malfunctions can result in serious injury or death. Given your beliefs about the likelihood of injury or death, you evaluate the expected value (probability*outcome) of the time and effort saved by taking the elevator up 30 floors compared with taking the stairs, whether you are aware of this or not. A less risky way to travel, but takes longer and is more tiring.
You are gambling with your life every second of every day. That's not a bad thing; it's just the nature of humans being unable to perfectly predict the future. What a terrifying existence it would be if we knew exactly how the future would play out. I prefer our imperfections.
The narratives you tell yourself about certain behaviors inform your perception of their risks. I call it narrative. For social creatures like humans, narratives are created primarily through the "wisdom" of the group. For better or worse, the most powerful narratives are the ones everyone believes.
Narratives are also created from objective facts. In most cases, facts are discrete events that indicate that certain actions are risky. In fact, avalanches are more common on 40° slopes. It is a fact that people have been injured or killed while riding in elevators.
Common chitchat and objective facts combine to create a narrative. Although the facts are clear, it is challenging as a person to know the exact number of people who die in elevators in proportion to the total number of elevator rides. It is also challenging to know how many skiers have died in avalanches on a 40° slope compared to the total number of skis on similar slopes. To the extent we are unable to ensure the accuracy of actuarial data, we rely on others.
Here’s the thing.
Avalanches:
I know this type of avalanche is more common. But my guide, who had extensive experience and training in how to determine which slopes are prone to avalanches, believed this particular route was safe. Safety does not mean that avalanches will not occur; safety means that the probability of avalanches is acceptably low. So, because of my trust in his training system, which has evolved from the experience of thousands of mountain guides, I will follow him down this slope.
Elevator:
I know that taking the elevator is more dangerous than taking the stairs. But everyone else was taking the elevator. If everyone else is riding the elevator, it must be safe. Everyone can't be wrong at the same time. Additionally, there are building codes created using the experience of trained engineers, and the elevator is safety certified. So, trusting the expertise of engineers I'd never met and the wisdom of the crowd, I felt safe while riding the elevator.
The way we assign probabilities does not depend on facts or techniques, but on our perception of the facts And the quality of technology. These opinions are based on facts or good techniques stated by others who we believe know more than we do due to their training and experience.
Cryptocurrencies:
To tie this to cryptocurrencies, consider the following. Suppose a new project claims to use new technology to solve a problem. The problem they claim to solve is well known, and the tokens of other projects trying to solve it are highly regarded. You trust the engineers on the project to be smart and talented enough to solve the problem. You believe this because other engineers who have launched successful crypto projects are advising them. You also have confidence in the team because they are graduates of prestigious technical universities and have experience working in successful technology companies. Because the narrative is strong (narrative + technology), you invest. But dig deeper into your thought process, and which is more important: narrative or technology?
Narrative. Narrative is more important than technology. Your perceived probability of success is based on others' perceptions of the problem and others' perceptions of the team's technical capabilities. In rare cases, you have the ability to evaluate technology at only a basic level. That's why you trust people you think are more knowledgeable than yourself to indicate whether the technology has a good chance of solving the problem.
While your technical skills are often not enough to properly evaluate a project, you can easily understand how good a narrative is. A good narrative is one that more and more people tell each other. Of course, it would be nice if the narrative was told in a positive way. For example, “In this cycle, all retail traders will move from CEX to DEX.” But even if this narrative is negative: “It is impossible for retail traders to leave CEX and move to DEX.”, the narrative of trading volume migrating from CEX to DEX Still spreading. I don’t care if people believe the narrative; I don’t care. I just want them to say a positive or negative variation of it. Because more money is made by going long than by going short, optimism will trump pessimism during the cycle. This is how the human brain is wired.
What is my job?
While my official title is Chief Investment Officer at Maelstrom, I should change it to Chief Narrative Officer. I tell narrative. The better and more concise the narrative, the faster it spreads. The more viral a narrative is, the more the tokens associated with that narrative will increase in value.
Technology is not important!
Maelstrom’s finance professionals all graduated from the Wharton School of the University of Pennsylvania with a degree in finance. I didn't plan it that way; it just happened. While we understand the potential applications of cryptography and blockchain technology, we are not cryptographers, distributed network experts, or have deep computer science knowledge. When we do a transaction, we outsource technical due diligence to others with these skills.
Others may be leading venture capital firms or qualified angel investors in pre-sale token rounds. Some may be well-respected technical advisors to the project. In the absence of these types of validators, we may feel comfortable with the technology because the founders have launched successful projects, and by successful, we mean the applications used by many crypto projects in the past.
Our job is to ensure which projects are most likely to succeed vertically. Success depends on macro and micro narratives that are widely communicated. You can make the most money by going from being thought to "never" happen to "could" happen by tokens attached to the narrative.
I would rather invest in a token with a perceived probability of success of 0.01% and a narrative in the viral growth stage than I am willing to invest in tokens with a perceived probability of success of 50%, but the narrative has reached the stage of common sense. If the probability of success went from 0.01% to 1% because the narrative quickly infected a lot of people, my money would increase 100x. But the only way to multiply my money 100x using a coin with a perceived probability of success of 50% is if the actual results, in any form related to the project, are so amazing that the growth comes from the observed results, rather than rising perceptions of future success.
The macro narrative tells the story of the observed trend and how the project will capitalize on it. This is more of a narrative than a trend, as we take a small initiative and extrapolate its impact further into an uncertain future. Macro Narrative: “Retail derivatives trading volume is shifting from CEX to DEX.” BitPerp is building a permanent (perp) exchange DEX. BitPerp’s token will rise because its macro narrative is currently unknown but has viral potential to infect the minds of many.
The micro narrative explains why this particular project will be the best among all the competitors within a specific macro narrative . Micronarrative: "BitPerp was advised by Arthur Hayes, who helped invent perpetual contracts." When others heard about Arthur's involvement, they thought the project would get some cool recommendations to help them outperform all other competing projects.
This blog is generally about macro narratives. Most of the time, I tell a narrative about thieving central bankers and politicians who destroy the value of time and human effort by printing fiat currency. The narrative I tell is the narrative of how Bitcoin and the crypto ecosystem are the antidote to this organized theft of human dignity. But given that I run a trading book, I also tell a micro-narrative about cryptocurrency trends and how the prices of my chosen coins and tokens will increase as more people believe and hear the narrative.
I don’t often do in-depth analysis of specific coins other than Bitcoin and Ethereum, but hey, it’s a bull market right now, folks. I've laid the foundation for the significant forces driving cryptocurrency usage and adoption, and it's time to tout my portfolio.
Results
Doresults, by which I mean growth in transaction volume, total value locked, number of unique wallets, etc., matter? Yes, they are important, but their importance to the token price varies depending on which part of the hype life cycle you invest.
When investing in a narrative/trend that you think will happen from "never" to "maybe", the importance of project appeal is low. The market didn’t have high expectations as the token was considered to be part of a trend that was unlikely to grow in the future. Therefore, even mediocre results can be considered groundbreaking because expectations are so low.
When investing in a narrative/trend that you think will move from “maybe” to “definitely”, project traction is very important. Market expectations are high because they believe in a bright future. Results that were considered exciting in the previous phase are considered mediocre in this phase. Amazing results are not enough; more effort is needed. At this stage, a project must be truly revolutionary to meet expectations.
Altcoin Narrative Time
The purpose of this article and reflection exercise is to provide readers with an understanding of the conceptual framework that guides Maelstrom. Over the next few months, most of the articles I write will focus on the specific tokens we hold and their macro and micro narratives. These tokens have already launched or are about to go public, so I try to spread this narrative widely. I don't care if you buy or sell any of the coins talked about. What I care about is that I presented such a provocative narrative and supported your argument with others discussing it in a positive or negative way.
I knew I had succeeded when I read the following on social media:
“Have you read Arthur’s latest article? Oops, this guy is a huge douchebag There’s no way Pendle will surpass Binance to become the largest derivatives trading platform in crypto. I don’t even know what an interest rate swap is, and other decentralized finance enthusiasts (degens) in the crypto community certainly don’t either.”
Or:
“Have you read Arthur’s latest article? We don’t hold enough Ethena. Tether is definitely not going to work, and Ethena will definitely become the top dollar Anchored stablecoins.”
Here is the general outline of the macro and micro narrative I plan to tell in the coming months.
Retail derivatives trading volume will move from centralized exchanges to decentralized exchanges.
The launch of ETH pledge will trigger an increase in the entire DeFi interest rate swap trading volume surge.
There is a way to leverage tens of billions of dollars worth of Low-market value junk coins drive DEX dual-currency derivatives trading volume.
DEX on-chain liquidity will be provided by middleware that enables Current market making companies are out of touch.
As DEXs become the primary venue for price discovery, providing settlement and clearing On-chain price oracles will become increasingly important.
Why Tether and any stablecoin will face problems using TradFi Bank to host fiat currencies pressure, and we can create fiat-pegged stablecoins without relying on TradFi.
How to solve the cross-chain bridging of assets without building a bridge .
Conclusion
Currently, attention is focused on the staggering amounts of Bitcoin being accumulated in U.S.-listed spot ETFs. This, combined with the global fiat currency devaluation spree, will push Bitcoin to unfathomable heights in fiat currency terms. The upcoming listing of an Ethereum ETF in the United States will also push Ethereum prices higher. I have Bitcoin and Ethereum. I might buy a little more, but overall my attention is turning to altcoins.
What coins can I buy that have better performance than Bitcoin, followed by Ethereum? This is Maelstrom's minimum threshold rate. We do this by learning as much as possible about certain projects and telling great narratives.
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