With Bitcoin spending most of last week above $8,000, a cautious optimism began to take hold in the market. Now, a week later, as the price hovers around the mid $7000s, it seems like last week’s movement was a temporary upswing in our continued bear market. No matter how long this particular patch of doom and gloom lasts though, there will be another bull market.

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While we spend a lot of time discussing the potential price, timing, or causal event for that bull turn, a more interesting and ultimately relevant question is what market narrative will drive it?

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Market narratives are the set of beliefs that investors use to explain market behavior and explain their actions. For example, right now, there is a market narrative that states that if the SEC approves a Bitcoin ETF, it will trigger a significant influx of institutional investment. Further, because there is a CBOE-backed proposal floating around, it is more likely than ever to happen in the coming weeks. With that ETF decision expected by August 10th, many are pointing to this particular market narrative as explaining last week’s market gains.

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Arjun Balaji called market narratives his “favorite fundamental indicator” and defined them even more simply: “Where are new capital inflows coming from and what narrative (read: meme) are they latching on to? As crypto-assets are purely reflexive, nearly all (real) market movements are driven by memes.”

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So which market narrative is likely to drive the next bull run, and why?

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Narrative Possibility #1: Fat Monies, or “Bitcoin, Not Blockchain”

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  What it is:

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Seeking vengeance on the “blockchain, not bitcoin” narrative of mid-2017, the Fat Monies thesis essentially argues that the preponderance of value in crypto is going to accrue to the cryptocurrency which becomes the long-term store of value. In other words, value accrues primarily to whatever becomes digital money. Investors who subscribe to this narrative are likely to invest in Bitcoin and a small basket of alternates SoV candidates that make different tradeoffs around privacy (ex ZCash) or governance (ex Decred).

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Why this narrative might take hold:

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There are a few reasons to think this market narrative’s time is nigh. First, the “utility thesis” has been assailed in 2018 and thanks to concepts like the token velocity problem, skepticism is high around the ability of dapp native tokens to capture value. Second, the above would be true even if the dapps themselves were thriving. They’re not. The media is full with reports of the high percentages of ICO projects that have already gone bust. Even thoughtful investors who can look beyond those sort of sensationalist headlines still recognize that dapps have a long way to go in terms of usability, functionality and product-market fit to really hit the big time.

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Third, the Lindy Effect is a powerful thing. The longer bitcoin exists, the longer it feels like it will inevitably exist. Even the people who are investing in dapps and alts still tend to also believe that Bitcoin (or at least, whatever SoV coin they think can out-Bitcoin bitcoin) is important, meaning that even the market narratives that aren’t entirely Fat Monies still contribute investment towards it.

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Countervailing forces:

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It seems to me that the strongest countervailing force is actually narrative possibility #2 below - that the excitement from institutional investors around tokenized securities is so high that it crowds out the Fat Monies thesis.

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Another interesting countervailing force has to do with the incentives of fund managers themselves. If the market narrative is that the correct strategy is to invest in BTC and a small handful of premium alts, it raises questions about whether it makes financial sense to park money in funds with 2 and 20 fees versus simply buying the assets directly. This actually creates an incentive for some fund managers to focus on alternative narratives that would promote a more diverse set of holdings.

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Where can I learn more:

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Narrative Possibility #2: “Liquidity Premium” & Tokenized Securities

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What it is:

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Tokenized securities refers to the idea of digitized equity and other digital, tokenized approximations of offline securities. It actually has a number of dimensions, including:

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  • tokenized digital approximation of existing offline securities like stocks
  • tokenized equity in new cryptoasset networks that enable regulatory compliant sales and securities offerings
  • entirely new categories of tokenized securities with no digital equivalents, such as automated dividend distribution via a security token
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What these concepts all share is 1) the ability to comply with existing and anticipate regulations; and 2) an emphasis on a “liquidity premium” or increase in value of the underlying assets based on the increased ease of trade.

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Why this narrative might take hold:

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There are a couple reasons this narrative seems likely to be a part of the next bull market.

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First, any market run has to have a source of new capital. While 2017 was a retail revolution in crypto, for a variety of reason the next bull market seems more likely to be characterized by institutional investors. Tokenized securities are in the institutional wheelhouse, at first glance reflecting more of an evolution rather than a revolution of existing financial instruments. For big firms who have been waiting on the sidelines, tokenized securities may be a way to extend existing business lines into the cryptocurrency without buying into the full philosophy of financial disruption.

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Second, for the crypto projects that have recently turned away from ICOs due to regulatory concerns, “Securitized Token Offerings” or STOs offer a regulatory-compliant alternative. Indeed, even outside of regulatory concerns, it is becoming more common for crypto networks to design their ecosystems with different types of tokens for different functions, including equity-like tokens that confer rights around governance or dividends. No matter which market narrative takes hold, a huge amount of entrepreneurial talent is flooding into the space. If they start adopting securitized tokens as part of their approach, it will shape the landscape even if the market narrative isn’t dominant.

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Finally (and to me, most interestingly), there is a growing community of people talking about why simply putting existing stock and other securities on a blockchain is the equivalent of PDFing the NYTimes in the 1990s to put it online. These folks are beginning to ponder what innovations might possible in the context of fully blockchain-native digital assets and protocols. As Nic Carter put it: “Tokenized securities are lame. Codifying shareholder-director relationships and providing frictionless strong assurances to both? 👀👀👀”

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The fact that this market narrative could resonate with 1) big institutional players; 2) startup crypto networks; 3) dissident innovators makes me strongly suspect it will play a big role in the next bull market.

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Countervailing forces:

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While the evidence is strong, tokenized securities are by no means guaranteed to be the dominant narrative. For one, just as tokenized securities will be better understood by institutions, so too will they be better understood by regulators. It is entirely possible that our current conception of how the market will play out is overestimating how frictionless they’ll actually be. As Scalar Capital’s Linda Xie put it: “Security tokens will be a huge market but I think many people overestimate how much more accessible they will be compared to traditional securities. Regulation still exists and there is a lack of high quality global identity services.”

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Second, even if it is institutional players that drive the the next bull market, it’s entirely possible that they’re captured by a version of the Fat Monies thesis enabled by the approval of some set of financial products that they understand, such as a Bitcoin ETF. This sort of strategy has the benefit of not requiring a massive new amount of domain knowledge and diligence processing (as would something like tokenized securities) to still get the market exposure.

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Third, no matter how interesting one finds them, tokenized securities are undeniably a phenomenon unto themselves, different from (if related to) other types of cryptoassets. There is already a lot of market money and power who are interested in keeping the focus on the more systemically disruptive, revolutionary side of the crypto space.

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Where can I learn more:

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Narrative Possibility #3: Protocol Wars

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What it is:

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The massive array of decentralized apps or dapps being launched today each face a decision about which smart contract protocol to employ. While to date, the majority of dapp tokens have been based on the Ethereum blockchain, the field is increasingly full of competitors who promise things like better scalability and more transactions per second; novel consensus mechanisms ; or alternative approaches to protocol governance.

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The Protocol War narrative would build on Joel Monegro’s “Fat Protocol” thesis that the majority of the value in a dapp ecosystem flows to the protocol layer. In this narrative, investors would be focused on figuring out and making bets on the smart contract protocols most likely to capture developer attention.

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Why this narrative might take hold:

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There is some sentiment among professional that we remain in an infrastructure rather than an app stage in the lifecycle of the industry. This could easily translate during the next run to a reduced emphasis on dapps and a heightened focus on picking protocol winners (or a market basket of contenders).

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Indeed, there is certainly capital evidence that at least among the current crop of professional investors, the protocol wars matter. Placeholder VC made a big bet on Decred, citing the company’s belief in the ultimate importance of governance as the most significant long term driver of developer devotion. Other protocols ranging from GoChain to Nem to NEO to Harmony all themselves have serious backing, each promising something slightly different.

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Perhaps most notably, EOS has raised more than $4 billion in a token sale (not to mention a recent check from Peter Thiel for an undisclosed amount). Over a billion dollars of this is committed to a set of different “ecosystem funds” meant to invest in projects built on the EOS blockchain. While these ecosystem funds on their own aren’t enough to make the market move, if significant institutional or retail investors follow it could get interesting.

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Lastly, as new mainnets come online with different approaches to consensus, they’re creating new business models outside of simple token investing that could bring diversified capital into the space. EOS Block Producers and Tezos Delegators are examples.

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Countervailing forces:

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Simply put, the Fat Monies concept feels ascendent at the moment as compared to Protocol Wars, while the tokenizes securities concept is more native to a potential new class of institutional investors. Protocol Wars requires understanding new concepts...not least of which is what the hell a “protocol” is.

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Where can I learn more:

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Narrative Possibility #4: Overperforming Dapps

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What it is:

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The companies who have ICO’d over the last year have made a lot of promises about a lot of exciting decentralized applications. If these dapps come to fruition and actually attract big networks of users, they will be revolutionary. Of course, that’s a big if.

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Today’s investors tend to be split between people who think that dapps are promising but need time to develop into their full potential, and people who think dapps are a distraction from real questions like “what becomes digital money?”

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The interesting thing is that shared disbelief that dapps will make a dent in the immediate term creates the possibility for an “Overperforming Dapp” narrative. Because people don’t expect it to happen, if some dapp does suddenly surge into mainstream consumer consciousness, it could have a proportionally bigger impact on the market narrative.

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Why this narrative might take hold:

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There are many categories of dapps, but for the sake of the market narrative question, let’s look at three. It feels unlikely to me that the “centralized experience killers” - the dapps trying to replace centralized network effects businesses with decentralized alternatives that rip out rent extraction - are likely to overperform in the short term. Even if those companies can figure out how to sufficiently incentivize switching behavior, it’s going to be on a much longer time horizon.

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The NFT field, on the other hand, has more promise for a breakout in the short term. We’ve already seen one such mini pop, with CryptoKitties capturing at least the crypto market’s attention late last year. Moreover, NFTs are simply plumbing in a space where the behaviors (collecting, gaming, trading) are aligned with existing consumer norms, and the benefits (true ownership, liquidity) are actually clear. It’s by no means guaranteed - as what people decide to collect and what games capture attention are enormously hard to predict or design for - but it feels promising.

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Still though, if I had to bet on a category of breakout consumer dapp, it would be something like the Fomo3D, PoWH3D games that have exploded into the discussion over the last two weeks. I mean this not in the sense of a Ponzi-style casino game, but in the sense of an unpredictable experience that leverages unique aspects of cryptocurrencies to provide consumers something they’ve never seen before.

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Countervailing forces:

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All of these scenarios involve not only lots of hard work but a good bit of luck. What’s more, to the extent that the new capital influx that drives the next bull market does come from institutionals, it’s going to be hard for any dapps that look like games and toys to drive more attention than the big fundamental battles for the infrastructure of money’s future.

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Where can I learn more:

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Narrative Possibility #5: “Dont Miss Out On This Once In A Lifetime Chance,” aka “Moby Dick,” aka “We’re all still the Whales’ Greater Fools”

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What it is:

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Growing up, my favorite book was Moby Dick. I have to admit that there is a part of me that worries that all of us in the retail investor class are little Ahab’s in our dinghy’s, chasing the great white whale that always, no matter what we do, has the upper hand.

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In this analogy, of course, the whale is the whales. This narrative isn’t so much a motivating market narrative but an explanation of might happen. Throughout this entire bear market, ICOs have continued to raise gobs and gobs of money. It seems largely on the back of global whale syndicates blessing deals, getting their discounts, and passing the full prices tokens on to retail investors.

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In some ways, this ‘shitcoin waterfall’ preys on the dreams of the emergent class of retail investors who see token markets as something akin to a combination of venture capital and an alternative stock market where they can actually participate early meaningfully. These retail investors want to believe in the excitement of new protocols, new dapps, and new tokens.

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Given how much of the 2017 market was driven by this interplay between the greater fools business model of whales and the aspirations of retail, it’s not impossible that this story repeats.

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Why this narrative might take hold:

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People have a long history of wanting to believe that some next big thing is the thing that can transform their financial reality. Here’s a scenario:

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Let’s say some big new money enters the space through an institutionally-focused vessel like the VanEck/SolidX ETF. It’s meaningful, but not market changing, and most institutions stay sitting on the sideline.

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At the same time, whales and other major crypto investors get excited about that drip of water in the desert and pump enough to capture the attention of both the growing crypto media that includes everything from legitimate publications and research to highly lucrative paid shill Youtubers as well as the mainstream media, who have gotten bored with the bear market narrative and want a positive new story.

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All of a sudden, everyone is screaming about the next bull run and the set of retail consumers who weren’t totally paying attention last November/December start to perk up. They look around to find a set of wallets and onboarding solutions that are a year more advanced and a year better designed for getting them involved. They buy...the price surges...they tell their friends...you know the story.

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This is one of about a dozen plausible scenarios that ends in the same place: a fundemental repeat of the “Don’t Miss Out On This Once In A Lifetime Chance” narrative from late last fall.

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Countervailing forces:

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People got burned last year. In addition to a year of better designed wallets and other tools for new buyers, we also have a year of ICO projects dying and disappointing and a year of the growing prominence of market voices casting doubt on the token market as a whole. This is to say nothing of regulators who have a year more sophisticated understanding of the space and will be watching any retail involvement in whatever the next bull market is much more closely.

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Finally, the Bitcoin Maximalists have emerged as a major counter alternative to the stockmarket of tokens even for smaller, retail investors. This suggests that even an institutionally-driven ascendent Fat Monies thesis is going to have room for the retail investors, as well.

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Where can I learn more:

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So What’s It Going To Be?

The only sensible answer to which of these narratives will actually drive the next bull market is to throw up one’s hands and claim that no one can predict the future. But we didn’t all jump into the reinvention-of-money-and-society industry to be sensible, so here goes:

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I believe that the combination of whale manipulation and retail aspiration are going to be a part of any bull market. It’s sort of impossible to conceive otherwise. That said, I do think there are some scars and heightened market skepticism of dapps, in general. To me, it’s much more likely that the new money which catalyzes the next movement is institutional, and Bitcoin Maximalism is creating an alternative narrative aligned with Fat Monies that even retail investors can rally around.

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In terms of dapps, having a breakout decentralized consumer experience drive market action would be one of the most fundamentally sound reasons for investor dollars to get excited. That said, to use the ol’ ballgame analogy, I don’t even just think we’re in early innings when it comes to consumerized dapps, I think we’re still trying to decide which sport to play. Decentralized alternatives to centralized network effects businesses have a long way to go to be worthy enough for consumers to switch. NFTs have tons of promise and align with existing behaviors, but still involve some consumer luck. And when it comes to massive unexpected phenomena like Fomo3D, it’s just nearly impossible to predict.

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When it comes to the smart contract protocol wars, I do believe that they will be a signficant focus for VC-style investors who are making a long-term bet on the meta technology pendulum swinging back to decentralization along with the privacy and 1st party data control it brings. This category of long-hold investor will be developing and investing against theses around what features either of protocol design or governance and community are likely to win the long-term devotion of developers. That said, I don’t think this category of investors is large enough to actually shape a bull market. What’s more, I think that the fat protocols thesis was a significant driver of the 2017 run and that this year, both the disappointment that coincides with the “ICO fail rate” stories, along with the explanatory counter thesis of Fat Monies are going to pretty significantly dampen the smart contract protocols impact on shaping the next dominant market narrative.

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Which gets me to the narratives I do think will shape the next big bull. I believe Fat Monies is a narrative whose time has come. The Lindy Effect - the idea that the longer a thing has existed, the longer it’s likely to live - is a real force. Bitcoin has not only survived another downturn that followed a year of “blockchain, not bitcoin” narratives, but has built an ever growing constituency of maximalists. I think that new institutional money will be a catalyst for the next major market movement, and that they are going to be more interested in the fight for what becomes money than the blockchain and dapps hustle. What’s more, it will make sense for much of that next exposure that will come through financial instruments like ETFs concentrated on Bitcoin itself and a very small handful of additional assets.

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Simultaneously, I think that this time around, the “shiny new object” to complement those Fat Monies investments will be tokenized securities. The whole new category of institutional investors get it, can extend their existing portfolios into it, and can use them to dabble in crypto without being completely out of their league. Frankly, in this reconing, it’s a better version of “enterprise blockchains” that captured attention last year. At the same time, I think that a fair number of project leaders and entrepreneurs will start hacking on ways to design new types of semi-automated businesses that mess with on-chain cashflows, providing a continuous influx of creativity and experimentation into the space to complement the predictable, “liquidity premium on known assets” style investing.

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So, there is it. There’s my bets. What do you think?

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Author

Nathaniel Whittemore
Looking North