[Disclosure: I own 15+ crypto tokens, operate my startup using crypto tokens, and am bullish on web3.]
Web3 is a masterclass in storytelling. From the narrative manipulation of valuations, to the greater fool theory in cash-flow agnostic crypto VC, to the flawed decentralisation narrative, crypto leaves much to be desired.
Discerning fundamentals from hype has never been more important. Yet never has it been harder. Fortunately, the traditional rules still remain. We must think about value creation, value capture, long-term equilibrium value, what price to buy and what price to sell.
The changing narrative arcs of crypto allow it to survive. But narratives obfuscate fundamentals.
Let’s trace these changing narratives as a masterclass in storytelling.
It is November 2020.
Speculators compare crypto to fiat and gold.
The argument goes like this:
But mid-2021, crypto crashes. A new narrative is needed.
It is November 2021.
Speculators compare crypto to the internet in 1998.
Crypto user growth = internet user growth.
Crypto's lack of functionality = impotence of early computers.
The narrative is crypto 2021 = internet 1998.
This cycle of narrative, counter-narrative, new narrative has played out time and time again. For example, the 2017 narrative was for Bitcoin to replace central banks. The 2013 narrative was of a black-market currency.
This dynamic isn’t exclusive to cryptocurrencies. It’s inherent in all belief systems. For example, Religions update their narratives as society changes. Genesis is now framed as an allegory following evidence of the Big Bang.
But the changing Bitcoin narrative doesn’t make it a bad asset. Such fluidity arguably makes the asset antifragile to changing social sentiment. Some believe that new narratives give rise to stronger fundamental valuations.
My word of caution is simply this: one must discern fundamentals from narrative hype.
The Cambrian explosion of YouTube videos, jargon, and semi-plausible technobabble of consensus algorithms, proof of stake, and even 70,000% APY, are NOT fundamental price drivers. Utility alone does not justify valuation. And nor does widespread use.
Equally, just because something has value doesn't mean that buying it at any price is a good idea. You need to think about value capture, long-term equilibrium value, risk, what price to buy and what price to sell.
Ask 99.9% of people whether they want to run a server at home, embrace an inferior product experience, and switch their bank accounts, email addresses, and other logins to decentralised alternatives.
The answer is a resounding no.
I will go as far to say that decentralisation will never happen in the way that maximalists predict.
Decentralisation is only interesting insofar as it creates new use cases and better product experiences. We cannot foresee these by extrapolating our current level of thinking, which brings me to my next point...
A common crypto narrative is “let’s take this web2 company and create the web3 alternative”. This is known as skeuomorphism. Examples of skeuomorphism include creating “Web3 Uber” or “Web3 record-keeping” or “Web3 ticketing” or “Web3 eBay”.
Whilst this appeals to our narrative intuition, it typically fails because new startup ideas tend to be unintuitive. They tend to be innovative. They tend to be market defining.
The best use cases for Web3, therefore don’t have analogues in Web2. The future is more different than we think and therefore narratives are a flawed way of forecasting.
Smart investors embrace fickle narratives to sell to the “greater fool”.
For a crypto VC, the project’s long-term outcome is often irrelevant. What matters is that the project can construct a compelling narrative and list on Binance. That’s 20x in the bag, even if the project never produces cash flows.
No wonder it’s so easy for crypto startups to raise money.
Will this model last? Probably not. It requires retail investors to ‘ape’ into the token as YouTube videos advise:
“You don't ape into this because it’s a smart bet. You ape into this to tell your grandchildren. You sit little Billy on your knee, and tell him that you saw some things no man should ever have seen."
Web3 will usher in a new age of startups. The holy trinity of NFTs, DAOs and DeFi might one day replace the structures of society. But for now, it’s hard to see beyond the vapourware, Ponzi schemes and narrative manipulation.
Just because something ‘sounds nice’ doesn’t mean it creates value.
Just because something creates value doesn’t mean it captures monetary value.
Just because something creates monetary value doesn’t mean that it has a reasonable valuation.
If there’s one takeaway from the article, it’s this: question everything, look to value creation and value capture, investigate to fundamentals to inform your thinking.
Web3 is the future, but not everything’s gonna make it.