This article features insights from Shane Neagle, Editor-in-Chief at The Tokenist.
Not all narratives are equal.
In today’s digital finance landscape, investing in various assets has become more accessible than ever. This shift comes as the importance of protecting wealth from the impacts of central banking—known as inflation—has become increasingly urgent. To keep pace with inflation, investments need to consistently deliver high single-digit returns as a minimum.
However, the rush to outsmart inflation and mitigate capital gains tax has led to a trend where investing resembles gambling, particularly in the blockchain sector. As investors seek resilience in their asset staking strategies, several key considerations emerge.
Barrier to Entry: Stocks vs. Cryptocurrency
The cryptocurrency landscape presents a duality in barriers to entry, unlike the more rigid stock market. On one hand, access to capital has broadened, while on the other hand, companies face heightened scrutiny and regulatory challenges when going public. This is reflected in the substantial decline in the number of publicly traded stocks since the mid-1990s, with a drop of 56% by 2020, reducing the number from over 8,000 stocks.
Publicly traded companies are tethered to physical operations that incur costs and necessitate regular financial disclosures, resulting in a predictable cycle of investment inflows and declines. This cyclical nature keeps the stock count relatively stable and linked to economic conditions.
In essence, stocks come with inherent entry barriers from a business standpoint, which signals their potential value. This concept does not translate to digital assets, particularly cryptocurrencies that utilize proof-of-stake algorithms like Ethereum while Bitcoin remains in the realm of proof-of-work. This evolution eliminates the need for physical mining infrastructure, leading to a significant increase in the number of available cryptocurrencies.
The number of cryptocurrencies has skyrocketed, far surpassing the approximately 16,218 stocks reported at the time of writing. As these coins vie for limited investment capital and attention, the proliferation of tokens contributes to a dilution effect.
Creating Narratives as a Substitute for Earnings
Cryptocurrency creation is not only easier but also offers simplified access through self-custodial wallets and decentralized exchanges. While this accessibility may seem advantageous, it raises questions about the overall benefit to investors’ portfolios.
A striking example of potential pitfalls is the Hawk Tuah (HAWKTUAH) coin, which has plummeted by 99.14% since its launch in July.
With the lack of quarterly earnings reports, crypto investors have increasingly relied on narratives or “vibes”:
- Is the story (the coin’s central theme) gaining popularity?
- If yes, traders expect others will feel FOMO (fear of missing out).
- The FOMO is often rooted in prior memecoin stories, such as those of Shiba Inu or Dogecoin, which significantly enriched early investors.
This dynamic is reminiscent of lottery psychology. The fact that some have won lottery prizes fuels the allure of potential life-changing gains, no matter how unrealistically slim those odds might be. This strong narrative surrounding memecoins has propelled their performance over the past year as a market cap-weighted category.
However, these “performance” figures include the influx of memecoins that increase market capitalization and create new speculative intrigues. In reality, most traders experience losses when relying on such narratives. According to data from Pump.fun at Dune Analytics, around 60% of memecoin investors end up losing money.
A REMINDER THAT:
• 60% of all memecoin traders lost money trading memecoins.
• 4.7% made no money.
• 24% made less than $100.
• 11.2% made more than $100.
• 3% made more than $1,000.
• 0.5% made more than $10,000.
• People who have made more than $10K can barely… pic.twitter.com/ADakThjOcX
— Kermit 🐸 (@crypto__kermit) November 19, 2024
Despite the clear resemblance between memecoin trading and gambling, these digital currencies are treated similarly to other, more established coins. This includes Bitcoin, which maintains fixed scarcity and is anchored by significant computational infrastructure in the real world.
Consequently, it is reasonable to argue that certain crypto narratives detract from the broader cryptocurrency market. After all, the capital invested in these speculative assets could potentially yield greater returns elsewhere. But where exactly might that capital be more effectively allocated, aside from the obvious choice of Bitcoin?
Identifying New Crypto Narratives in an Abundant Field
Similar to the way AI trends propelled Nvidia (NASDAQ: NVDA) to a $3 trillion market cap, the narrative around AI is becoming increasingly dominant in the cryptocurrency world, often overshadowing even memecoins. But what exactly does the union of AI and blockchain offer?
These two technologies complement each other remarkably well. Blockchain facilitates trustless networks, which are essential for autonomous AI agents to function without central oversight. For example, AI can be deployed to automate various tasks, such as managing investment portfolios or optimizing yields on decentralized finance platforms.
This means these technologies can turn digital assets into steady income streams. The Virtuals Protocol (VIRTUAL) enables users to create and co-own AI agents that engage with diverse blockchain networks. This capability has already propelled the VIRTUAL token by over 5,000% in just three months.
Another noteworthy initiative is ai16z (AI16Z), inspired by entrepreneur Marc Andreessen, co-founder of venture capital firm Andreessen Horowitz (a16z). It serves as the first AI-governed Decentralized Autonomous Organization (DAO), with the utility token AI16Z supporting activities within this virtual fund by automatically trading tokens on DeFi platforms, posting on social media, or browsing the web for insights.
In just the past month, AI16Z gained 90% in value.
Additionally, NeuralAI (NEURAL) fits into a broader ecosystem where AI agents generate 3D objects from textual descriptions. Although the token saw a 30% decline over the month, it has increased by an impressive 911% over the year.
Likewise, Morphware (XMW) enjoyed a 291% rise in value within the same timeframe, focusing on decentralizing the computing power needed for AI infrastructure, monetizing GPU resources across a peer-to-peer network.
The Future of AI and Blockchain
As 83% of companies identify AI as their top priority, many are actively exploring the integration of blockchain in this evolving landscape. If AI can generate coherent text from input sentiment, it’s reasonable to anticipate it can also analyze market sentiment. Consequently, machine learning (ML) and natural language processing (NLP) might enhance complex derivatives trading such as futures contracts by leveraging technical indicators and social media cues.
Indeed, AI agents may outperform humans in trading volatile memecoins, continuously generating social narratives around market fluctuations. This could lead to a dynamic where different agents compete against each other in trading strategies.
Similar to traditional arms races, such an environment could further enhance the value of tokens associated with AI-driven projects and their supporting ecosystems. While lottery-style discrepancies in profit are not likely to disappear, advancements in AI-driven trading within the crypto realm may provide a form of balance for assets like memecoins.
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