Crypto Narratives: Meaning, Examples & How to Identify Them

Financial markets have always been susceptible to relevant news, global occurrences, and investor sentiment. Cryptocurrency space, being comparatively smaller than traditional markets, is generally much more sensitive to prevailing trends and people’s beliefs. These crypto narratives have a significant impact on the ecosystem, and knowing about them is vital.

Narratives in decentralized finance represent a blend of many different aspects of the crypto sphere and its participants. Their influence ranges from affecting the individual’s decisions to moving the entire space.

So, what exactly are crypto narratives, how do you recognize them, and what can you gain from that knowledge? More importantly, what are the currently prevalent narratives that you should look out for? We explore all that and more in this article, so keep reading to gain an edge over the market.

What Are Crypto Narratives?

Crypto narratives are overarching trends that have an impact on the entire space of decentralized finance (DeFi). They often develop from a blend of different aspects, such as technological advancements, economic conditions, investor sentiment, cultural trends, and more.

Historically, one of the most prominent narratives was Bitcoin being a store of value cryptocurrency and acting as digital gold. The idea is that BTC is a flexible, digital asset decoupled from a traditional market. As such, it can provide a hedge, especially in times of uncertainty with other assets, such as real estate and stocks.

That was one of the biggest reasons for the initial growth of DeFi. It first attracted retail investors before eventually winning over multi-billion-dollar companies like MicroStrategy and Tesla. Today, there’s an ongoing discussion on having a Bitcoin exchange-traded fund (ETF).

Crypto narratives are usually formed and initially spread by various entities, such as industry leaders, prominent developers, project owners, influencers, news outlets, and more. The decentralized nature of cryptocurrencies allows narratives to form organically and become popular as genuine interest grows among participants.

This process of popularization often occurs on social media websites, forums, discussion groups on platforms like Discord and Telegram, meetups and conferences, etc. As the narrative’s acceptance grows and its discussion intensifies, crypto enthusiasts simplify the complex technology and terminology behind it, facilitating its mainstream adoption.

Ultimately, crypto narratives can grow to the point where they can impact the entire crypto market. It can influence price movement, foster the creation of advanced technologies, promote the generation of new cryptocurrencies (e.g., Dogecoin and many dog-themed tokens that followed), and so on.

The Importance of Crypto Narratives

Crypto narratives are important because they can help investors make better trades and impact the DeFi ecosystem as a whole. Understanding them is essential for any crypto enthusiast, as they provide valuable information on both micro and macroscopic levels.

Firstly, a solid understanding of the current crypto narratives is vital for investment decision-making. By combining that data with relevant information about blockchain technologies and cryptocurrency use cases, individuals can better predict which coins or tokens are likely to surge in price due to increased demand.

Sometimes, a strong narrative can drive the entire market and impact whether there’s going to be a bull run or a bear run. It’s not uncommon for these tendencies to turn into self-fulfilling prophecies, as both positive and negative sentiments can act as reinforcing feedback loops.

Simply put, the idea of a bull run can quickly gain traction in the community, becoming stronger as it attracts more investors. As more participants join and invest, the market keeps growing, further reinforcing the idea of a bull run.

However, not all crypto narratives end up being accurate. Some trends die out before being adopted by a broader audience. Also, it’s not uncommon for influential entities to try and start their narrative, often driven by the desire for profit. That’s why it’s crucial to not only be able to recognize crypto narratives but also to determine which ones are valid.

7 Current Crypto Narratives

Let’s check out some of the most prominent crypto narratives in 2023. The examples can help you better understand what narratives are and give you an idea of what trends might continue going forward.

#1. Liquid Staking Derivatives

Liquid staking derivatives (LSDs) are innovative cryptocurrencies that give holders more flexibility when staking assets. They were introduced and popularized by the Lido Finance protocol in 2020 and have been on the rise ever since.

Traditional staking on proof-of-stake (PoS) networks often requires users to lock up their assets. On top of that, sometimes there can be lengthy (or even indefinite) unlocking periods where holders don’t have any control over their crypto.

LSDs are derivatives pegged to the staked assets that act as digital promissory notes or IOUs. They maintain the same value as staked coins or tokens while being fully flexible. Owners can use them in various DeFi protocols for trading, staking, lending, liquidity providing, and more.

Due to their elasticity and the ability to still grant holders staking rewards, liquid staking derivatives have been gaining popularity over the years. Thanks to this, they will likely remain one of the most prominent crypto narratives in 2024.

#2. Artificial Intelligence

Artificial intelligence has seen an explosion in growth in recent years. For example, ChatGPT—a language processing model—keeps breaking all records regarding adoption. It reached 100 million active users in just two months. For comparison, it took TikTok nine months to reach that number, while Instagram needed 2.5 years to get that many users.

Some of the biggest tech companies in the world have entered the AI race, like Google with Bard and Microsoft, by integrating ChatGPT into Bing. This innovation led to the creation of many AI-related projects and cryptocurrencies, which quickly surged in price. Some notable examples include DeepBrain Chain (DBC) and SingularityNet (AGIX).

Apart from language processing models, some generative models use AI to create images and graphic design. Notable examples include Midjourney, DALL-E, and Stable Diffusion. They all require a significant amount of GPU power to run. That’s where solutions like Render Network and its token, RNDR, come into play, which represent decentralized computing networks.

#3. Real World Assets

Real-world assets (RWAs) are being increasingly tokenized and introduced into DeFi. They can represent anything from real estate and precious metals to government securities like bonds.

This process brings benefits to both decentralized and traditional finance (TradFi). On the one hand, the TradFi market is colossal compared to DeFi. Global real estate alone reached $326.5 trillion in 2020, while the entire crypto market cap was $757.3 billion at the time. Bringing all that value to DeFi will contribute to its growth and adoption.

On the other hand, tokenizing real-world assets gives them unprecedented flexibility and usability within DeFi protocols. Holders can leverage the power of blockchain to effortlessly trade tokenized RWAs, lend them, use them as collateral, etc. There’s also fractionalization, which allows the partitioning of expensive items to make them more accessible.

Maple Finance, Centrifuge, and Goldfinch are some of the most prominent platforms facilitating RWA’s transition into crypto.

#4. Layer 2s: Zero Knowledge Rollups

Layer 2 (L2) protocols represent endeavors to vertically scale layer 1 (L1) blockchains. L1 blockchains represent the foundation of decentralized finance. These are networks like Bitcoin, Ethereum, and Cardano.

However, all L1 networks face the problem called “the blockchain trilemma.” Essentially, every network needs to make compromises between three major aspects: security, scalability, and decentralization.

L2 zero knowledge rollups (ZK rollups) aim to solve the scalability issue by taking the transactions away from slow layer 1s, processing them in batches, and only returning the post-transaction information to be recorded on the L1 network.

ZK rollups allow for the verification of transactions without their revelation (hence the “zero knowledge”). They are perfect for privacy-centric networks. Some of the notable examples include Polygon and Scroll.

Another L2 scaling solution to keep an eye on uses optimistic rollups. Networks that use these rollups have the same goal of increasing L1s throughput, and they can have even lower fees than blockchains that use ZK rollups, but the model is trust-based and less privacy-oriented. Notable examples include Optimism and Arbitrum.

#5. China’s Economic Development

China has a history of banning crypto and virtual currencies. In one way or another, the country has banned Bitcoin, various other coins and tokens, and their trading on 19 different occasions by the end of 2023. At the same time, China had its own crypto exchanges, such as BTC China, Huobi, and OKCoin.

One of the most impactful recent actions was a complete ban on all cryptocurrencies in 2021, which resulted in Bitcoin losing more than $2,000 when the news broke out. Still, the narrative changed near the beginning of 2023, when the country lifted its COVID-19 lockdown, simultaneously infusing its economy with 600 billion yuan.

These actions reinvigorated investors’ interest in China-related cryptocurrencies, like VeChain (VET) and NEO (NEO). The sentiment was further reinforced once Hong Kong started allowing retail investors to buy digital currencies once more, starting June 1, 2023.

#6. New Layer 1s

While layer 2 scaling solutions introduced verticality to blockchain scalability, new layer 1 networks aim to improve on the existing solutions and achieve horizontal scaling. The goal is to solve the blockchain trilemma without introducing additional protocols to achieve enhanced transaction speed, lower costs, and boosted interoperability.

A notable example includes Sui, the first permissionless L1 blockchain developed from square one. It’s a scalable blockchain with cost-effective transactions and NFT support. Moreover, the network was created by former Meta engineers, which only favors the L1 narrative surrounding Sui.

Another example is Celestia, a modular blockchain that separates its consensus from the execution layer. Simply put, the network verifies transactions while its participants validate them.

#7. Decentralized Stablecoins

Stablecoins are volatility-resistant cryptocurrencies pegged to another asset—like fiat USD—to ensure their price stability. They are often used for trading and conserving value during bear runs.

However, the biggest and most popular stablecoins, like USDT and USDC, are centralized. This means centralized authorities are responsible for burning and minting these tokens and preserving their peg. This is a problem, as it involves a level of trust in these entities that often aren’t entirely transparent.

On the other hand, decentralized stablecoins, like crvUSD and GHO, embrace the core principles of cryptocurrency. They are trustless, transparent, and not governed by a singular entity. Their popularity is on the rise, and while the massive collapse of UST was a setback, the interest in these stablecoins is likely to continue to grow.

How to Recognize Crypto Narratives Early On

You can recognize crypto narratives early on by paying attention to macroeconomic developments, examining on-chain data, following the money, and more. That’s important as it can help you get ahead of the competition and move early, often getting into projects before they take off or selling assets about to lose value.

Here are some of the best methods to find the next crypto narrative on time:

• Look out for useful projects.Cryptocurrencies and DeFi protocols that tackle prominent, long-lasting problems and offer viable solutions offer intrinsic value to the space. If the problem they aim to solve is often discussed, these projects will likely become first movers when the broader change starts.
• Stay updated on the latest news and happenings. Crypto space moves fast, and the latest news and developments can vastly change the landscape. You can stay in touch by regularly visiting blockchain-related news websites, browsing the social media accounts of notable individuals and entities, participating in online discussions, and more.
• Monitor on-chain data. On-chain data is the information about all the blockchain activity. Users can know how crypto is moving between wallets by keeping an eye on it. Individuals can track the performance of whale investors, known traders, VC funds, and others, allowing them to “follow the money” and adjust their strategy accordingly.

Early identification of crypto narratives is one of the core aspects of a fundamental analysis. It helps investors make informed decisions that align with market sentiment, increasing their chances of success.

It can also help with risk management. For instance, in a market driven by speculation, many developers try to build interest around their projects to raise prices. However, if the narrative isn’t there, the chances that these projects succeed are much lower.

Key Takeaways

As you can see, crypto narratives are much more than short-term trends and mundane social media chatter. They represent the collective thoughts and feelings of the entire community, often inspiring macroeconomic movements.

We’ve come a long way since the early days of Bitcoin. The notion of digital gold has slowly attracted many investors over the years. However, the landscape has evolved significantly since then, and the narratives have become more complex.

Paying attention to the current happenings in the sphere allows for everything from daily narrative-driven crypto trading to long-term investing. Keeping up-to-date with these trends is vital to succeeding in the DeFi space!