Narrative Economics of the crypto market: Vision over metrics, sentiment before application

Author: jawor, encryption KOL

Compiled by: Felix, PANews

"The human brain is naturally good at telling stories. And the economy is built on the foundation of human decision-making." - Robert J. Shiller (American economist, Nobel Prize winner in Economics)

1. Narrative as a market engine

In December 2017, something strange happened. Friends who had never cared about the encryption market began to ask how to buy Bitcoin. It wasn't because they had read the white paper or even understood what blockchain was. They had simply heard a story: someone they knew had made life-changing money.

That's enough.

In the narrative economics described by Nobel laureate Robert J. Shiller, cryptocurrency is the most fertile ground: the infectious narratives that influence market behavior are no less than, and may even exceed, traditional macro factors such as interest rates or GDP.

Retail investors have changed the game. In traditional finance, capital typically flows through structured channels: fund managers, analysts, and investor reports. Now, capital flows through memes, viral posts, and high-quality Telegram groups. Narratives have become the new fundamentals. This is most evident in the field of encryption.

When the market heats up, narrative becomes an important factor in capital allocation. It's not the white paper, it's not the balance sheet, but belief.

The core argument is: the volatility of the encryption market does not depend on technology, user growth, or revenue (at least not in the early stages). It depends on belief, and belief is built on compelling stories.

2. How narrative works: Viruses with capital

Robert Shiller believes that the spread of economic narratives is like a virus. The most powerful narratives are not necessarily true—they are just infectious. They appeal to emotions, a sense of identity, and the psychology of FOMO. In the realm of cryptocurrency, this spread is instantaneous, global, and amplified by algorithms.

A typical narrative often begins with a seed idea: Bitcoin is digital gold. Ethereum is a world computer. DeFi is the new banking system. These ideas are simple, intuitive, and emotionally appealing. Once such narratives become popular, they start to reshape people's values.

A powerful encryption narrative typically follows the following trajectory:

• A narrative is born: Someone writes a blog post, a key opinion leader hints at a trend, or a charismatic founder articulates a vision.
• This narrative spread through social platforms, YouTube channels, and Discord.
• As the influence of narrative increases, it will change the way people think. Even if there are no changes on the chain, the relevant assets feel more valuable.
• Capital inflow chasing this narrative.

People often talk about network effects in a technical context. But the narrative itself also has network effects. The more people believe a story, the more real it becomes: this is true on a social level, an economic level, and ultimately on a financial level.

There are two key elements that can make a narrative more compelling:

• A familiar face: a character who can represent this narrative. Think of Satoshi Nakamoto's mystery, Vitalik's wisdom, or Anatoly's product strength. People are drawn to faces.
• A familiar plot: great narratives often resonate with well-known storylines. For example, the rise of the underdog, rebels, and revolutions. Cryptocurrency perfectly aligns with these themes. It is anti-bank, anti-establishment, and supports freedom.

Ultimately, in the encryption field, narrative is not an additional layer on top of the product. The narrative is the product itself.

3. Case Study: Narrative Creates Market

Bitcoin: Digital Gold

In 2020, Bitcoin itself did not change. What changed was people's perception of it. The mainstream narrative shifted from "peer-to-peer cash" to "digital gold." Suddenly, Bitcoin was positioned as a means to hedge against inflation, becoming a safe haven in the era of money printing. It was not the technology of Bitcoin that attracted MicroStrategy or Tesla, but this idea.

The mysterious legend of Satoshi Nakamoto also plays a role. This vanishing founder makes the story more appealing. It’s not just code — it’s a movement.

Ethereum: The World Computer

When Ethereum was launched, there were almost no dApps available. However, its concept - a decentralized platform where anyone can build unstoppable applications - is highly attractive. The saying "code is law" has deeply resonated. What the market is buying is not actual usage, but potential.

Ethereum becomes valuable not because of its current state, but because of its promise.

The Summer of DeFi in 2020

During the summer of DeFi, the yields were absurdly high. But the core driver was not the annual percentage rate (APR), but the narrative: permissionless finance, becoming your own bank, and financial primitives unrestricted by banks or borders. This idea spread rapidly. Most protocols had almost no revenue, very few users, and the tokenomics had flaws - but it didn't matter. The narrative itself was enough to overshadow reality.

NFT as Cultural Ownership

Why are some people willing to spend millions of dollars on a JPEG image? Because NFTs are not about the image itself - they are about identity. The narrative is simple and enticing: digital ownership will redefine art, music, and status. Owning a "Bored Ape" is not for aesthetic reasons, but to showcase identity.

The narrative itself is more important than the product. This is the reason for its success.

AI Tokens for 2023 - 2024

Some projects with insufficient product features and zero revenue have skyrocketed just because of the phrase "AI + encryption = future." The concept of AI, which has long been popular in traditional finance (TradFi), has now spread to the cryptocurrency space and brought in a large amount of speculative capital. Practicality doesn't matter; the narrative is key.

Meme tokens with the word "agent" in their names surged by 10 times. Founders are adding "AI" to their roadmaps one after another. Investors are optimistic about their potential, even if it's just talk for now.

4. Why is the encryption market particularly susceptible to narrative-driven influences?

Cryptocurrencies lack traditional valuation benchmarks: no balance sheets, no price-to-earnings ratios, and no regulatory documents. This makes the field particularly susceptible to narratives rather than fundamentals.

In addition:

• This is a market dominated by retail investors and thriving on speculation.
• The meme culture that spreads rapidly through social media.
• The liquidity of the tokens and the ability to list them without permission.

These factors create a perfect breeding ground for narrative-driven price behavior. In other markets, narratives are merely accompanying phenomena. However, in the field of encryption, they are the driving force.

The price of cryptocurrency is not based on the present, but on the possible future.

5. Advantages: Trading Narrative

In a narrative-driven market, the advantage comes from early recognition.

Smart traders and funds do not just analyze charts or read code. They pay attention to the social aspects: who is tweeting, the intensity of memes, whether there is emotional interaction, and whether the narrative is moving from niche to mainstream?

Here are some popular narratives:

• Modular Blockchain: "A New Design Space"
• Solana becomes the new Ethereum: "fast, cheap, and clean"
• RWA: "Balancing returns and compliance"
• Proxy-based Decentralized Finance: "AI Protocols That Think for You"

Every narrative follows the same lifecycle:

• Spark: This idea emerged in alpha chats and early discussions.
• Spread: Influential people magnify it.
• Frenzy: Everyone is involved, and the tokens skyrocket.
• Disillusionment: Products failed to deliver, interest wanes.
• Exit or evolve: narratives either perish or transform.

Timing is crucial. If you enter in the second phase and exit before the fourth phase, you are going with the trend. If you miss the cycle, you can only bear the "burden" of the narrative.

Can narrative be invested in?

Of course. In fact, in the early days of cryptocurrency investment, narrative was one of the few reasonable frameworks.

Robert Shiller presented a compelling argument: ignoring narratives is ignoring macro forces. In the realm of encryption currencies, this is magnified. Narratives not only reflect the market but also create the market.

As cryptocurrencies gradually approach traditional finance, some noise may diminish. However, this field will always attract speculators, dreamers, and builders who value vision over metrics.

In the field of encryption, the most successful people are not always the most outstanding engineers, but rather those who are best at interpreting market sentiment.

So, it is important to pay long-term attention to the narrative, keep an eye on community dynamics (CT), and follow the latest trends. The narrative may not be encoded but rather written.

If cryptocurrency is a grand narrative, perhaps the best traders are those who read a few chapters ahead.

Related reading: "Shanzhai Season" new version: Say goodbye to the general rise, narratives such as ETF, real returns, and institutional adoption will ignite a "selective bull market".