Narrative, Manipulation and Trading
Trade against the masses..?
Narratives
For crypto assets and some growth stocks in SaaS, electric vehicles or biotech field, what's the fundamental drivers of price performance?
The answer is narratives and storytelling, it can take assets to ludicrous valuations in the billions or even tens of billions in value. We have seen Tesla, Nikola, WeWork, Bitcoin, Ethereum and Dogecoin gain valuations stretching far beyond what any reasonable numbers-based valuation can justify.
Regarding crypto, it's even harder to conduct valuation analysis since there is no real revenue, and the market cap solely relies on community consensus. In the economic cycle with cheap money (low risk free interest rate), valuations are also elevated by overflowing liquidity in capital markets with a powerful narrative,
Anyway, assets backed by powerful narratives could reach exorbitantly high. Understanding narratives is essential to investment or trading decision-making. Let's do an anatomy of a narrative.
Good narratives could capture the minds of millions or even billions. We live in an era of information overload where words, pictures, sounds and videos leap out of our screens, grab us by our heads and make us pay attention. In most cases, we willingly give our attention up and we have neither the time nor mental capacity to critically think about every piece of information that comes at us.
The biological computing (our brain) has a capacity limitation.
Narratives helps us make sense of the complex, fast paced world around us. The truth and reality are intricate and convoluted, which means mapping out the real picture is very costly. The essence of narrative is information compression, it simplifies complex concepts and logics to be easy to remember, understand and disseminate. People need to make decisions based on bits of information in short period of time very often. While statistics and numbers should matter, people respond more powerfully to emotion.
Hence, a rational actor must also consider the behavior of irrational actors.
Narratives in Investing & trading
Believe it or not, much of investing even in the institutional investment world involves narratives.
When you put together an investment memo or draft a pitch deck for your fund internally or externally, to some extent you have to pitch a narrative or story behind the investment if you want the fund to invest.
No one is investing millions of dollars or billions into a company based on the numbers in a DCF model (because sometime there is more science fiction in Excel..). Such models heavily rely on a bunch of assumptions which are fragile in a rapidly changing world, or the existing data and information cannot even support you to build a model.
You have to formulate a story around a company and its future.
Think about Ethereum:
Ethereum was co-founded by a 22-year-old genius boy Vitalik Buterin and became the world first smart contract platfrom which enable decentralized computing. Anyone from anywhere at anytime can build on and access the Ethereum network without permission and identification. Ethereum will became the base layer of future decentralized value internet and financial system by eliminating middlemen, improving effciency and enpowering soveregnity.
Think about Tesla:
Tesla was founded by the legendary entrepreneur Elon Musk who also founded SpaceX, SoloarCity and Paypal. The mission of Tesla is accelerating the world's transition to sustainable energy. Tesla designs, develops, manufactures, sells and leases high-performance fully electric vehicles and energy generation and storage systems, and offers services related to products. Tesla is leading autonomous driving and humanoid technology with disproportionately huge advantages aiming at revolutionizing and reshaping what human civilization looks like.
These are powerful narratives. If you unpack the anatomy of the Ethereum and Tesla narratives. The important components are:
Inspirational leadership
Its history
The product
The markets it operates in
Competitive positioning
A bold vision for its future
Can you see all of these components in the paragraphs listed above?
A narrative-first approach to investing would then assess these components and connect them to observable metrics. Ideally, narratives could materialize and generate fundamental value.
Ethereum has the highest number of developers and validators. It is also home to almost all of the innovative applications in Crypto that have real adoption and has massive network effects that give it a competitive advantage over other smart contract platforms.
Tesla has the best profitability, highest vehicle manufacture capacity, most data(cumulative miles) for autonomous driving, strongest supplychain management and integration, powerful AI hardware(Dojo), highest talent density and unparalleled brand popularity.
But not all narratives will ground in reality. Most seemingly attractive narrative end up with failure, collapse or even scam.
Narratives outrun reality, but at least should be possible
Crypto assets in particular have a tendency to become massively overvalued (sometimes to the point of creating risks to the broader ecosystem like Luna/Terra)
When analyzing narratives for our own investments, we differentiate between what’s likely and what’s unlikely.
A great example would be OlympusDAO from last year. The narrative of “decentralized reserve currency” was extremely unlikely but people were calling for $100 billion market cap. If you had ran numbers on what sustained buying pressure would’ve been needed at their rate of OHM issuance to maintain such a level, the numbers were astronomical. What they did have were treasury assets and community attention. A more realistic narrative would’ve been how they could use the assets they had to build a sustainable protocol within the crypto market.
You could even argue that Ethereum’s narrative outran reality for some time, with many of the projects that drove network activity being entirely speculative and deeply correlated to people’s lack of understanding and drunkenness on markets flush with liquidity.
Think critically about what narratives are likely vs unlikely, possible vs impossible, and you’re more likely to be able to sell when things get overheated and buy when things are oversold.
Being too focused on narratives means you have blind spots. Being too focused on data means you miss opportunities. Being too analytical slows you down. Being too lax increases your risk. It takes time to find the right balance.
Media manipulation
If you're familiar with the cryptocurrency realm, you'd know that the platform previously known as Twitter (now referred to as X) is a pivotal hub for related information. X is the epicenter where cryptocurrency news emerges, project teams showcase their features, and daily discussions take place.
During the previous bullish phase, there was immense excitement about new tokens and projects. Crypto folks will analyze Twitter activities and followers in order to smell upcoming project rollouts ahead of time. A project gaining traction during its launch could mean multi-million dollar profits for founders' team.
Such potential rewards can, unfortunately, give rise to unethical practices.
Automated social media bots are designed to mimic human actions and autonomously share and distribute content. These bots can be deployed to affect public opinions.
In crypto, they can be used to create fake hype and promote pump-and-dump schemes. It should come as no surprise at all that the foulest player of them all, FTX/Alameda, is being accused of making use of bots to promote tokens they had invested in.
In stock market, remember the GameStop trading frenzy in 2021? An analysis by Massachusetts-based cybersecurity company PiiQ Media revealed the role of bots on major social media platforms during this saga, suggesting an intricate web of influence than initially perceived.
Like NCRI, PiiQ Media did a study aimed at understanding the role of inauthentic social media activity, particularly from bot-like accounts, in the GameStop trading frenzy.
The analysis indicated that bots on platforms like Twitter, Facebook, Instagram, and YouTube were actively hyping up GameStop and other "meme" stocks. That means some set of organized economic actors were behind some of this activity.
PiiQ Media examined posts across the mentioned social media platforms, searching for patterns in keywords related to GameStop. They identified very similar daily "start and stop patterns" in the GameStop-related posts, especially at the beginning and end of the trading day. PiiQ believes these patterns to be indicative of bot activity.
PiiQ estimated that tens of thousands of bot accounts were hyping GameStop, meme stocks, and even Dogecoin. Thousands of these fake accounts could be purchased for as little as $200.
The biggest implication here is that this suggests a level of market manipulation that goes far beyond individual retail investors. When organized actors can use bots to influence stock prices, it poses significant challenges for investors who rely on social media sources for information.
Manipulation in crypto
The Network Contagion Research Institute (NCRI) is an independent organization that “provides pioneering technology, research, and analysis to identify and forecast cyber-social threats targeting individuals, organizations, and communities.”
Their recent report conducted an examination that alleges FTX used bot activity to spur demand for tokens on Twitter.
The report also delves into the recent "memecoin" craze, focusing on coins like $PEPE and $PSYOP. Both these coins, at their peak, reached a market cap surpassing $1 billion. Per their report, the rapid growth of these coins was fueled by a mix of authentic and inauthentic bot-driven activity on Twitter.
Today’s post discusses the role of bots in financial assets and aims to help you defend your capital from social media market manipulation.
The NCRI study was conducted with the following parameters:
3,000,000 tweets from January 1, 2019 to January 27, 2023
Mentions of 18 coins that were both publicly listed on FTX and promoted by the official FTX handle (@FTX_Official)
Over 180,000 accounts were analyzed, with 6.5% of them believed to be bots
Despite the relatively small number of bots, they generated 20% of chatter about the coins
The study notes that bot activity for coins increased following a listing on FTX, and the proportion of bot tweets about a coin grew more artificial over time.
Genuine discussions about a coin were more indicative of upcoming price shifts compared to artificial bot chatter. However, the impact of artificial discussions was still notably significant.
Below, the NCRI highlights the impact to price after spikes in bot tweets for the RNDR token.
So, we know coins have been and continue to be manipulated using social media activity fueled by bots. How do we know FTX employed this strategy? Well, we don’t. The NCRI study offers the chart below looking at coins that were allegedly subject to insider trading by Alameda.
NCRI's study suggests that the intensification of social media activity was not merely an organic outcome of the coins’ popularity, but potentially a strategic ploy to influence market sentiment. Contrary to conventional wisdom, NCRI's findings show that it was not just price variations that significantly influenced tweet volumes, but that the reverse was true as well.
The implications of such manipulative mechanisms on the broader financial markets cannot be overstated, given the accelerated adoption of cryptocurrencies. The surge of bot-like activity around $PEPE and $PSYOP coins suggests that this phenomenon is ongoing and underscores the crossroads of inauthentic social media activity and cryptocurrency market dynamics.
In conclusion, it is evident that as cryptocurrency grows increasingly mainstream, the potential for market manipulation through social media and inauthentic activity presents considerable risks to investors and the stability of financial markets. Regulators, platforms, and the public must be aware of these tactics and develop methods to identify and counter such strategies.
Trading Strategy
Let's take a step back. Media manipulation not only applies to small market cap tokens, but also to high profile tokens and even BTC or ETH.
Compared with stock market, crypto market has almost zero formal regulation which means unethical and even illegal actions like media manipulation and insider trading are rampant. In general, the healthier and more mature a financial market is, the longer the bull market and the shorter the bear market.
That is the reason why the US stock market is in the bull cycle most of the time, while the Chinese stock market and crypto market are relatively poorly-performed. The underlying reason is most companies in Chinese stock market and protocols in crypto cannot generate intrinsic value and the inevitable result is that market will be donimated by manipulation and speculation behaviors. Then, narratives and storytelling play a much more important role in an immature financial market like crypto .
But let's be realistic and constructive: What's the long-term profitable trading strategy in crypto
1) Narrative and storytelling decide the token picking
For macro and generals:
The "first principle" here: 1% people earn 99% of profit in trading market because of power law.
Thus, the possibly profitable trading strategy is standing on the opposite side of the market(the majority of participants). Do not trust the common narrative the mass believed on the market, for example:
Bitcoin halving is a significant bullish event for the market.
The Fed is lowering the interest rate, so the market will pump.
New important features will launch and the market will pump.
Institutional investors are buying, so the market will pump
Regulatory authorities approve new development policies and financial products, so the market will pump
Plan B's prediction or any valuation models like S2F.
For project or specific verticals：
Bitcoin tells a story of digital gold, Ethereum tells a story of world computer, these narratives are already partially realized in market.
Internet Computer($ICP) tells a story of decenralized cloud computing or AWS, but to date the project has no substantial progress and it seems like a scam when you are looking at the past price performance of its token
Gamefi tells a story of X to earn. Axie Infnity tells a story of play to earn and successfully opens up the ceiling of blockchain game. StepN tells a story of running to earn and healthy life which gain lots of traction in crypto, it's also a good trading opportunity when reviewing the token price history. Why do these iconic projects gain popularity? It's not about tech, user experience or economical sustainability but 1) narrative easy to accept and 2) playability to materlize it
2) Market sentiments, news, technical analysis decide the timing of trading actions(long or short)
Timing a complicated and mature market like US stock market is hard, but timing the crypto market might be feasible.
There are 3 core indicators when timing the crypto market ordered by importance, and you need to combine them together organically to draw to accurate predictions
Sentiment: You need to make a guess about the long/short sentiment of the masses, because market will always move against what most people think. This indicator is hard to quantify and formalize since it's dynamically changing all the time. But you can perceive on crypto twitter, your social network platform and even the people around you.
News: All kinds of bullish and bearish news in crypto, most of the news are pure noise while the important news will naturally come to you since it's widely circulated. For example: Coinbase's IPO, FTX's collapse, LUNA's failure, BlackRock's ETF filing, you name it. For alt-coins, the news could be like "xxx NFT project is displayed on the big screen at Times Square", announcing a new partnerships with tech giants like FANNG or some other product updates. In most cases, it might indicate the market is overbuying and people with bags are dumping. Everyday there are thousands of news, good and bad, but the key is how to filter and select.
The following charts expain what is “Show me the chart, I will tell you the news:)“
Technical analysis: Sometimes you need to read the candle line, it not about making decision by conducting technical analysis, but TA is the language that traders use which helps you plot out what's happening on the market. Will not unpack here. One of the common tactics is to build a consensus and break it like deceptive patterns of candlestick charts.
3) Stakeholder analysis. It's about the background of the founder's team, incubators' background, VCs on the cap table, supports from exchanges, market makers behind etc.
Last
All indicators and strategies are not absolutely effective, it’s a game of probabilities changing and evolving with the market.
But one thing for sure, trading market follows a power-law distribution.