Weekly update on development process (Jul 25, 2022)
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- 🧠 Explored the impact of virality on the financial assets.
- 🧠 Determined how the traders choose between conflicting narratives.
- 🤝 Advised another project (stealth mode).
We’re continuing our research on virality. This time, we’re tackling the following question: out of multiple conflicting narratives, which one is going to become dominant?
For example: suppose it’s May 25, 2020 and BTCUSD is trading at ~9500. We have two conflicting narratives:
- The Fed is printing USD, so BTCUSD should go up.
- The price is in the resistance range, so BTCUSD should go down.
Intuitively, we feel that the first narrative is “stronger” than the second one. But how to formalize this fact?
One way is to assume that more people know about basic economics (supply & demand) than about resistance ranges. So even though the “resistance” narrative is still valid, it is weaker than the “inflation” narrative. In other words: the “resistance” narrative has lower virality because less people understand the term “resistance”.
Generally, fundamental narratives are stronger than technical ones — precisely because more people can understand the fundamentals. However, in the absence of a fundamental narrative, the technical one becomes dominant. For example, this happened on BTCUSD in April 2019, when the uptrend was produced without any fundamental factors, but only due to the technical hypothesis that “3k was the bottom”.
One can also argue that such an uptrend was produced by the “echo” of the fundamental narrative that “Bitcoin is better money”, but I disagree. I think most of those people that were influenced by this message have already bought it by that time.
The strongest narratives are always based on “supply shocks”. This is because people want to hold an asset that will increase in price, and the price is the ratio of two supplies (price = supply of asset X / supply of asset Y, that’s how Uniswap pools work). So, an increase of asset X supply will lead to asset X price going down. This is a physical fact, so the narratives based on supply shocks are the strongest.
It is interesting to note that people discount the long-term effects of supply mechanics. For example, they are willing to buy “farm tokens” that give them yield in the same tokens. It’s obvious that supply of those tokens is going to infinity, so the price is going to zero long-term. But the price increases short-term, because enough people believe that they can buy now & sell later with additional yield.
However, it’s dangerous to play such short-term games. It’s much safer to play the long-term macro narratives that are based on supply shocks which can’t be predicted in advance, but can be assessed quickly when they happen.
Next week’s focus
- 🤝 Advise current projects.
- 🤝 Increase our network & strengthen existing connections.
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