I’ve been trading narratives for almost 3 years.

Without a doubt, narrative trading can be very profitable if you manage to bet on emerging trends before the masses.

But at the same time, you can get wrecked if you hop on a trend too late. I lost a bunch of money when I first started trading because of this.

There’s a reason why 90% of traders lose money.

It takes a lot of time, dedication, and patience to become profitable.

In this issue, I want to cover my strategy for crypto narrative trading and a few tips to maximize your profits.

Let’s dive in 👇

The Narrative Trading Playbook

At first, the general playbook for narrative trading seems quite simple:

• Spot an upcoming major crypto catalyst
• Identify related coins that benefit from it
• Invest in them
• Sell when everyone starts talking about them

An example of a catalyst that had a massive positive impact on the price of AI tokens is NVIDIA’s AI conference, which took place in March earlier this year.

Leading into the event, AI tokens performed extremely well because it was speculated that some major AI news would drop during the conference. On top of that, the teams of several crypto projects such as Near Protocol participated in the event.

If you had bought NEAR or other popular AI coins a few weeks before the conference, you would have made a lot of money.

$NEAR price performance leading into NVIDIA’s AI conference

Platforms like Coinmarketcal (crypto calendars) can be useful for finding upcoming catalysts that could positively impact the prices of certain tokens.

Besides upcoming catalysts, major unexpected news can also lead to the formation of a new narrative.

For instance, earlier this year BlackRock announced the launch of its tokenized fund on Ethereum. This news created a lot of hype around the RWA sector, and many RWA coins doubled or even tripled in price in the following days.

In hindsight, trading narratives seems easy. But the problem is that it can be very hard to tell if you’re early or not to a trend.

And timing is everything in crypto.

Later in this issue, I’ll cover a few methods you can use to increase your chances of being early to emerging trends.

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The 3 waves of hype

Most major narratives form in 3 phases:

• First of all, several smart money wallets start buying coins related to a potential upcoming narrative \
  (smart money refers to highly experienced traders)
• Then a few X accounts with a small audience begin to share the bull thesis for that narrative on X
• Ultimately, everyone starts talking about that narrative on X and the tokens related to it skyrocket. This is a good time to begin taking profits

So how can you use this information to your advantage?

Your goal should be to always hop on new trends before everyone and their mother start discussing the bull case for them on social media platforms.

Here are a few ways to increase your chances of being early to future narratives:

1. Use on-chain data to your advantage

On-chain analytics platforms like DeFillama (which are 100% free) make it easy to discover emerging trends in DeFi.

For instance, here’s how you can use DeFillama to gain an edge:

• go to DeFillama
• click on DeFi → Overview
• click on ‘1m Change’ to sort protocols by recent TVL growth
• after that, click on TVL Range and select a minimum of $5M-$10M, and select ‘Apply Filter’

Then DeFillama will show you the fastest-growing DeFi projects over the past 30d.

If you see that multiple top protocols from a certain crypto sector (e.g. RWAs) are growing at a very fast pace, this may be a sign that a narrative is forming around that sector and that it’s time to pay attention to it.

2. Build your network

“Your network is your net worth” is not just a meme.

One underrated piece of advice is to try to reach out to other narrative traders on social media platforms and build strong relationships with them.

You can use X’s Advanced Search function to find people who talked about a narrative or a token before it pumped. (see a video tutorial for this below)

After you find a few people who seem to know what they’re doing, send them a message in an attempt to build a connection.

If you do that and maybe also offer them value in one way or another, they might return the favor and start sharing their trade ideas with you.

Don’t try to make it alone. This is like trading on hard mode.

3. Monitor smart money wallets

The easiest way to monitor the wallets of the most profitable on-chain traders and investors is by using a tool like Nansen.

Yet Nansen isn’t free and requires paying a monthly subscription. But even without Nansen, you can track smart money wallets using a free tool like Arkham.

Arkham has an advanced filtering system for filtering on-chain transactions.

With Arkham, you can easily find the on-chain wallets of the people who bought certain tokens right before they exploded in price.

Then eventually you can add them to a watchlist and track their on-chain activity using a tool like Debank or Arkham.

Whenever several wallets from that watchlist start buying the same token or multiple tokens of projects from the same crypto sector, make sure you keep an eye on those tokens.

I covered how to use Arkham and Debank in this thread a while ago:

Taking profits

Most narratives emerge due to one of the following reasons:

• major unexpected news (e.g. the real-world asset narrative was caused by BlackRock’s tokenized fund launch announcement)
• an upcoming catalyst (e.g. the crypto AI narrative in early 2024 was sparked by the high expectations for the upcoming NVIDIA’s AI conference)
• retail hype (GameFi is an example of a narrative loved by retail)

Depending on what type of narrative you’re trading, your exit strategy should be different.

For narratives caused by major unexpected news, it’s generally hard to estimate when they will be over.

But most of these last only for a few weeks. When trading those, rather than closing your entire position at once, I’d say it’s better to take profits gradually on the way up.

Moving on, narratives with upcoming catalysts are easier to trade imo.

In most cases, the prices of the coins related to those hit a local top just a few days before the date of the catalyst.

As I’ve mentioned earlier, NVIDIA’s AI conference contributed significantly to the emergence of a new narrative around AI tokens in Q1.

Many AI tokens reached their highest price level in 2024 on the day when the conference started or a few days before. After that, they started dipping.

So the conference ended up being a sell-the-news event.

90% of catalysts actually end up being sell-the-news events. Given this, I recommend taking profits heavily or even closing your entire position a few days before the catalyst that made you buy a certain token.

Speaking about the narratives that emerge due to retail hype, most of those are likely to last until the end of the bull cycle.

Of course, all of them will have periods of both ups and downs.

But AI for example is likely to remain a top-performing narrative for the entire bull market as it is easy to understand and loved by retail investors.

Wrapping up

Psychology plays a big part in when and why the crypto market moves, and game theory and market psychology take some time to understand.

If you want to start making money off narrative trading, one more thing I recommend is to start trading narratives with a very small amount of money.

Track your portfolio performance over time and see what mistakes you made and how you can become more profitable. Do more of what works and less of what doesn’t.

Only after you’ve been making money consistently for a long period of time consider increasing the size of your bets.

Trading can help you build wealth, but this isn’t something you can learn overnight.

That’s all for now.

I hope you found this article helpful. Thanks for reading!

Until next time,

The DeFi Investor

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