Crypto narratives: How the absence of earnings fuels investor fervor

The following is a guest post from Shane Neagle, Editor In Chief from The Tokenist.

Not all narratives are created equal.

In the age of digital financial platforms, investing in all kinds of assets has never been easier. This is happening at a time when the stakes are both clear and high. In order to outpace the erosion of money due to central banking, otherwise known as inflation, investing has to yield sustained high single-digit returns at a bare minimum.

But in a rush to outpace inflation, in addition to offset capital gains tax, investing has become akin to gambling. This is especially apparent in the blockchain space. To become more resilient when staking an asset, what should investors keep in mind?

Barrier to Entry: Stocks vs Cryptos

Lowering the barrier to entry works both ways in the crypto world, but not so much in the stock world. On one hand, people have easier access to capital, but on the other hand, companies face increased scrutiny and regulatory burden by going public. This is evident by the stocks drop off since the mid-1990s, having fallen by 56% by 2020 from over 8,000 stocks.

Number of stocks per one million people in the US. Source: World Bank, Image credit: fred.stlousfed.org

Because publicly traded companies are based on physical operations that exert expenditures and require quarterly financial reports, there is a cycle of inflows and drop offs.This leaves the number of stocks at approximately the same level, reliant on business cycles.

Combined, Nasdaq and NYSE exchanges host 5,704 stocks as of May 2024. Image credit: Statista

In other words, stocks have an inherent barrier to entry, from the side of businesses, which also serves as a signal for value. The same is not the case for digital assets. Notwithstanding cryptocurrencies based on the proof-of-work algorithm like Bitcoin, the vast majority of crypto coins are based on proof-of-stake consensus.

This means there is no longer a requirement for infrastructure in the form of mining hardware and electricity. In turn, there is no crypto equivalent when it comes to expenditures and earnings. Likewise, funded and generalized proof-of-stake platforms like Ethereum, BSC, Solana or Avalanche serve as a launching pad for easy token creation.

These factors are driving the number of cryptocurrencies to ever increasing heights, greatly overshadowing the number of stocks at 16,218 (at press time). All of these coins compete for a finite amount of capital and human attention, which means the more tokens are birthed the greater the dilution effect.

Narrative Creation as a Substitute for Earnings

Not only is it easy to create cryptocurrencies ex nihilo, but it is also easier to access them via self-custodial wallets and decentralized exchanges. At first glance, this may seem beneficial, but does it benefit people’s portfolios?

Among countless examples in the negative direction is the recent Hawk Tuah (HAWKTUAH) coin, having dropped by 99.14% in value since its inception in July.

HAWK memecoin follows a typical pattern of rugging, or pump-and-dump schemes. Image credit: CoinMarketCap

In the absence of quarterly earnings, and boosted by ease of entry, crypto traders have become reliant on “vibes”, or narratives:

• Is the narrative (the coin’s memetic centerpiece) popular?
• If it is, then traders speculate that other people will have FOMO (fear of missing out).
• The FOMO itself is based on previously established memecoin narratives, wherein dog coins like Shiba Inu or Dogecoin made some people rich.

The exact same principle exists in the lottery. Because it is known that some people won lottery tickets, the potential for life-changing gains is established, regardless how remote it actually is. This is why the memecoin narrative has been so performant over the last year, as a market cap-weighted category.

Comparatively, Bitcoin ranks 8th in performance at 106% over 365 days. Image credit: DefiLlama

Of course, that “performance” accounts for the flood of memecoins that increased the market cap and opened up new narrative gambling opportunities. In actuality, most traders lose money based on such narratives. According to Pump.fun at Dune Analytics, 60% of memecoiners lost their narrative bets.

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