What is narrative investment?
When there are few forms of value that can be expressed in terms of users, revenue, or any other numerical way, what remains is a conversation or, in other words, telling a story.
Telling a story can lead to absurd valuations of tens of billions or even hundreds of billions of assets.
Narrative is the reason for the good life of TSL, Dogecoin, and many other companies, their valuations far exceed any range that can be proven by a digital-based reasonable valuation.
Of course, Capital Market Liquidity surplus has also driven up valuations.
But some assets stand out among many, reaching surprising heights.
These assets are supported by a strong narrative.
Today it is raining, and I will delve deep into the narrative for everyone, as well as how crafting a narrative for your investments can make you a better investor.
Narrative can capture the thoughts of millions of people.
We are far beyond the world of acquiring information. Today, everyone bombards us with information. Texts, pictures, sounds, and videos leap out of our screens, grab our heads, and demand our attention.
Many times, we willingly give up our attention. After all, we neither have the time nor the mental capacity to critically think about every piece of information we receive. Storytelling helps us understand the complex, fast-paced world around us.
This also means that people in today's world make instant decisions based on information bits.
We have no interest in getting involved in politics on Decentralized Finance Ed, but they are a perfect example of a truly powerful narrative.
Narrative is something that takes people to the polling station or onto the streets with protest signs.
A fair society must also be seen as a fair society. If the claim that society is highly unfair reaches boiling point, it may have disastrous consequences.
While statistical data and numbers should be important, people's emotional responses are stronger.
Therefore, rational actors must also consider the behavior of irrational actors.
Investment Narrative
Believe it or not, even in the institutional investment field, many investments also involve narratives.
When you are preparing an investment memorandum for your fund internally, if you want the fund to make investments, to some extent, you must provide a narrative behind the investment.
No one would invest hundreds of millions or tens of billions of dollars in a company based on the numbers in the DCF model.
You must create a story around the company and its future.
For example, think about Ethereum.
Ether was founded by the genius teenager Vitalik Buterin in 2015, and it is the world's first smart contract platform. Anyone, anywhere, at any time can access and build the Ethereum network without permission or even proving their identity. Ethereum keeps a permanent record of all on-chain activities. As the largest, most decentralized, and most widely used smart contract platform, Ethereum will become the underlying layer of the internet and the entire financial system in the future by eliminating rent-seeking middlemen who infringe on our privacy and hold our assets.
This is a powerful narrative.
Let's unlock the analysis of the ETH narrative. The important components are:
Product
Its history
Inspiring leadership
The market it operates
Competitive positioning
Bold visions for the future
Can you see all parts about Ethereum in the paragraph above?
Then, the narrative-driven investment approach will assess these components and link them to observable indicators.
Ethereum has the most developers and validators. It is also home to almost all innovative applications in Crypto, which are truly adopted and have tremendous network effects, giving it a competitive advantage over other Smart Contract platforms.
Now, you can observe descriptions such as activities in the developer ecosystem and Decentralized Finance or Non-fungible Token.
The narrative transcends reality
Especially encryption assets have a tendency to be severely overvalued.
When analyzing our own investment narrative, we distinguish between what is possible and what is impossible.
Last year's OlympusDAO is a very good example.
The idea of 'Decentralization reserve currency' is highly unlikely, but people are calling for a Market Cap of $100 billion. If you have calculated the required continuous buying pressure for their OHM issuance rate to maintain such a level, then these numbers are astronomical. What they have is the national treasury assets and community follow. A more realistic narrative is how they use their assets to establish a sustainable protocol in the encryption market.
Critically think about which narratives are possible and which are unlikely, sell when things are overheated, buy when things are Oversold.
In Decentralized Finance education, look at everything from a holistic perspective. I realized that being too focused on narratives means you have blind spots. Being too data-driven means you will miss opportunities. Being too analytical will slow you down. Being too relaxed will increase your risks.
Finding the right balance takes time.
