I have been trading narratives for almost 3 years. There is no doubt that narrative trading can be very profitable if you can bet on an emerging trend before the majority of people do; but at the same time, it can also fail miserably if you follow it too late.
When I first started trading, I lost a lot of money because of this. There is a reason why 90% of traders lose money. It takes a lot of time, dedication and patience to be profitable. In this installment, I want to share my cryptocurrency narrative trading strategy as well as some tips for maximizing profits.
Narrative Trading Strategy Handbook
At first, the general strategy for narrative trading is fairly simple:
Look for the big cryptocurrency catalysts that are about to happen, identify the cryptocurrencies that are related to and benefit from them, invest in them, and sell when everyone starts talking about them.
An example of a catalyst that had a huge positive impact on the price of artificial intelligence tokens was NVIDIA’s Artificial Intelligence Conference held in March this year.
Ahead of the event, AI tokens were performing extremely well as there was speculation that some big AI news would be released during the conference. In addition, several cryptocurrency project teams, such as Near Protocol, also participated in the event. If you bought NEAR or other popular AI tokens in the weeks leading up to the conference, you would have made a lot of money.
Extended reading: Will NEAR become the leading public chain in AI by participating in the Huida GTC Conference? What ultimate move is it holding back?
Platforms like Coinmarketcal (Cryptocurrency Calendar) can help you find upcoming catalysts that could have a positive impact on the price of certain coins.
In addition to upcoming catalysts, major unexpected news can also lead to the formation of new narratives. For example, earlier this year, Blackstone announced the launch of its tokenized fund on Ethereum. The news sparked a lot of hype in the RWA space, with many RWA tokens doubling or even tripling in price over the next few days.
In hindsight, trading narratives seems easy. The problem is, it’s hard to tell if you’re an early adopter of a trend. And in crypto, timing is everything. Later in this issue, I’ll introduce some ways to help you improve your chances of early participation in emerging trends.
Three waves of hype
Most major narratives go through three stages:
First, some smart money started buying tokens related to potentially upcoming narratives. Then, several X accounts with fewer followers began sharing bullish arguments for that narrative on X. Eventually, everyone started talking about the narrative on X, and the token prices associated with it skyrocketed. This is a great time to start taking profits.
So how can you use this information to your advantage? Your goal should always be to catch new trends before everyone starts talking bullishly on social media platforms.
Here are a few ways to increase your chances of early participation in future narratives:
Use on-chain data to your advantage
On-chain analytics platforms like DeFillama (completely free) can help you easily spot emerging trends in DeFi.
For example, how you can use DeFillama to your advantage:
- Go to DeFillama
- Click DeFi → Overview
- Click "1m Change" to sort protocols by recent TVL growth
- After that, click on the TVL range, select Minimum $5M-$10M, and then select "Apply Filter"
- DeFillama will then display the fastest growing DeFi projects over the past 30 days.
If you notice that multiple top protocols in a certain cryptocurrency space (e.g. RWA) are growing at a very rapid rate, this could be a sign that a narrative is forming in the space and it’s time to pay attention to it.
Build your network
"Your internet is your worth" is more than just a meme.
An underrated tip is to try reaching out to other narrative traders on social media platforms and build strong relationships with them. You can use X's advanced search features to find people who talked about a certain narrative or coin before it rose.
Once you find some people who seem to know what they are doing, try sending them messages to try to establish contact. If you do this, and perhaps provide them value in some way, they may reciprocate and start sharing their trading ideas with you. Don't try to do it alone. It's like trading on hard mode.
Monitor smart money wallets
The easiest way to monitor the most profitable on-chain traders and investor wallets is to use a tool like Nansen.
However, Nansen is not free and requires a paid subscription. But even without Nansen, you can use free tools like Arkham to track smart money wallets. Arkham has a high-level filtering system for filtering on-chain transactions.
Extended reading: Encrypted Intelligence Platform》What is Arkham? Track on-chain data, whale movements, cash flow analysis... full teaching
profit strategy
The reasons for most narratives can be boiled down to the following:
- Big Unexpected News (Real World Asset Narrative Caused by Blackstone Tokenized Fund Announcement)
- Upcoming Catalysts (The cryptocurrency AI narrative in early 2024 is driven by high expectations for the upcoming NVIDIA AI Conference)
- Secondary market hype (GameFi is one of the favorite narratives of retail investors)
Depending on the type of narrative you trade, your exit strategy should be different.
For narratives driven by big, unexpected news, it's often difficult to estimate when they will end. But most of these narratives last only a few weeks. When trading these narratives, I think the best thing to do is to take profits gradually on the way up, rather than closing the entire position at once.
Next, for the narrative of an upcoming catalyst, I think it's easier to trade. In most cases, token prices associated with these narratives reach regional highs days before the catalyst date.
As I mentioned before, NVIDIA’s AI conference significantly contributed to the emergence of a new narrative around AI tokens in the first quarter of 2024. Many AI coins reached their highest price levels of 2024 on the day or days before the conference. After that, they started to fall. So this conference ended up being an event about “selling good news.”
In fact, 90% of catalysts end up being "sell good news" events. Given this, I recommend taking large profits a few days ahead of the catalyst, perhaps even closing the entire position. As for the narratives that emerge due to secondary market speculation, in most cases they will last until the end of the bull market.
Of course, they all go through cycles of ups and downs. But artificial intelligence, for example, is likely to maintain a high-performance narrative throughout a bull market because it is easy to understand and popular with retail investors.
Summarize
Psychology plays a big role in when and why crypto markets move, and game theory and market psychology take some time to understand. If you want to start making money from narrative trading, I recommend you start trading narrative with a little money.
Track your portfolio performance over time to see what mistakes you made and how you became more profitable. Do more effective things and less ineffective things. Only consider increasing your bet size once you have consistently made money over a long period of time. Trading can help you build wealth, but it's not something you can learn overnight.
