The DeFi Investor introduces the strategies and techniques of narrative trading in this article, discussing how to effectively trade in the cryptocurrency market, from discovering new trends to profit strategies. The article emphasizes the important role of psychology in market fluctuations and the time and patience required to establish successful trades. The author also suggests that beginners start trading with small amounts of funds and track investment performance to learn from their experiences.
I have been engaging in narrative trading for almost 3 years now. Undoubtedly, narrative trading can be highly profitable if you can bet on emerging trends before most people. However, it can also lead to disastrous losses if you join the trend too late. When I first started trading, I lost a significant amount of money for this reason. The fact that 90% of traders suffer losses is not without reason. Making profits requires a considerable amount of time, effort, and patience. In this article, I would like to share my cryptocurrency narrative trading strategy and some tips to maximize profits.
Narrative Trading Strategy Handbook
Initially, the general strategy of narrative trading is quite simple:
1. Look for upcoming significant cryptocurrency catalysts.
2. Identify cryptocurrencies that are related to and benefit from these catalysts.
3. Invest in them.
4. Sell when everyone starts talking about them.
An example of a catalyst that had a significant positive impact on the price of an AI token is the AI conference hosted by NVIDIA in March this year. Prior to this event, AI tokens performed exceptionally well because there were speculations that significant AI news would be announced during the conference. Additionally, several cryptocurrency projects, such as Near Protocol, were also involved in the event.
If you had bought NEAR or other popular AI tokens a few weeks before the conference, you would have made a lot of money.
Platforms like Coinmarketcal (cryptocurrency calendar) can help you find upcoming catalysts that may have a positive impact on the prices of certain tokens.
Besides upcoming catalysts, major unexpected news can also lead to the formation of new narratives. For example, earlier this year, Blackstone Group announced the launch of its tokenized fund on Ethereum. This news sparked a lot of hype in the RWA sector, and many RWA tokens doubled or even tripled in price in the following days.
In hindsight, trading narratives seems easy. But the problem lies in determining whether you are an early participant in the trend.
And in the crypto space, timing is everything.
In the subsequent sections, I will introduce some methods to help you increase your chances of early participation in emerging trends.
The Three Waves of Hype
Most major narratives go through three stages:
1. Initially, some smart money starts buying tokens related to the potential upcoming narrative.
2. Then, a few less-known X accounts start sharing bullish arguments about the narrative on X.
3. Eventually, everyone starts talking about the narrative on X, and the prices of related tokens skyrocket. This is a good opportunity to take profits.
So how do you leverage this information to gain an advantage? Your goal should be to always catch onto new trends before everyone starts discussing them on social media platforms.
Here are a few methods to increase your chances of early participation in future narratives:
1. Utilize on-chain data for an advantage.
Chain analysis platforms like DeFillama (completely free) can help you easily discover emerging trends in DeFi. For example, you can use DeFillama to gain an advantage in the following way:
– Go to DeFillama.
– Click on DeFi → Overview.
– Click on “1m Change” to sort protocols by recent TVL growth.
– Then, click on the TVL range and select the lowest $5M-$10M, and choose “Apply Filters”.
– DeFillama will then display the DeFi projects that have experienced the fastest growth in the past 30 days.
If you find that multiple top protocols in a cryptocurrency sector (e.g., RWA) are growing rapidly, it might be a sign that a narrative is forming in that sector and it’s time to pay attention.
2. Build your network.
“Your network is your net worth” is not just a meme.
An underrated advice is to try to connect with other narrative traders on social media platforms and build strong relationships with them.
You can use advanced search features on X to find people who have talked about a certain narrative or token before it gained momentum.
Once you find someone who seems to know what they’re doing, try sending them a message to establish a connection.
If you do so and maybe offer some value to them in some way, they might reciprocate and start sharing their trading ideas with you.
Don’t try to go it alone. It’s like trading on hard mode.
3. Monitor smart money.
Monitoring the wallets of the most lucrative on-chain traders and investors is easiest using tools like Nansen. However, Nansen is not free and requires a subscription. But even without Nansen, you can use free tools like Arkham to track the wallets of smart money. Arkham has advanced filtering systems for screening on-chain transactions.
Profit Strategies
Most narratives can be attributed to the following:
1. Major unexpected news (the real-world asset narrative was caused by the announcement of Blackstone Group launching a tokenized fund).
2. Upcoming catalysts (the cryptocurrency AI narrative in early 2024 was fueled by high expectations for the upcoming NVIDIA AI conference).
3. Secondary market hype (GameFi is one of the narratives favored by retail investors).
Depending on the type of narrative you are trading, your exit strategy should vary.
For narratives caused by major unexpected news, it is usually difficult to estimate when they will end. However, most of these narratives only last a few weeks. When trading these narratives, I believe the best approach is to gradually take profits during the upward movement rather than closing the entire position at once.
Next, for narratives driven by upcoming catalysts, I find them easier to trade.
In most cases, the prices of tokens related to these narratives reach local highs a few days before the catalyst date.
As I mentioned earlier, the NVIDIA AI conference in the first quarter of 2024 significantly contributed to the emergence of a new narrative around AI tokens. Many AI tokens reached their highest price levels for 2024 on the day of or a few days before the conference started. After that, they started to decline. So the conference ultimately became a “sell the news” event.
In fact, 90% of catalysts eventually turn into “sell the news” events. Given this, I recommend taking significant profits a few days before the catalyst, and possibly even closing the entire position.
As for narratives driven by secondary market hype, they usually continue until the end of a bull market.
Of course, they go through cycles of ups and downs. But, for example, AI could be a narrative that maintains high performance throughout the entire bull market because it is easily understood and favored by retail investors.
Summary
Psychology plays an important role in the timing and reasons for market movements in the crypto market, and game theory and market psychology take some time to understand.
If you want to start making money from narrative trading, I also suggest starting with small amounts of money.
Track the performance of your investment portfolio over time, see what mistakes you made, and how you can become more profitable. Do more of what works and less of what doesn’t.
Only consider increasing your bet size after consistently making profits over a long period.
Trading can help you accumulate wealth, but it’s not something you can learn overnight.