Crypto Narrative Trading Basics: Critical Thinking
In recent times, narratives have become a significant topic of discussion in the world of trading and investment. As someone who considers themselves an early narrative submitter, I believe it is essential to understand the basics of narratives and how they are often misunderstood.
First and foremost, let's start with the definition of a narrative. A narrative refers to a spoken or written account of connected events; in other words, a story. In the world of trading, narrative trading involves placing high-risk bets on tokens based on a story.
To illustrate, when Facebook rebranded to Meta, many people believed that the "story" of the Metaverse being the next big thing in tech was plausible. Crypto traders, in turn, connected this story to coins and began speculating heavily in tokens like $SAND$ and $MANA$ in October-November 2021. As a result, these tokens rallied 8-10 times within a few weeks, purely based on the belief that they represented the next big thing.
However, it is crucial to note that narratives do not always play out as expected. In the case of Metaverse-based tokens, the price eventually retraced to pre-pump levels. As a result, it is always advisable to have an exit plan when engaging in narrative trading. Every narrative will eventually die down, and the tokens will retrace, so traders should practice caution.
It is also important to note that narrative trading is not investing; it is more of a short-term strategy that requires traders to be early to a good enough story. Critical thinking is, therefore, essential when it comes to identifying narratives. Traders need to assess if any major news, even if unrelated to crypto, can be connected to crypto and if so, what coins are likely to be affected. By being faster and working harder than everyone else, traders can gain an edge in identifying and capitalizing on narratives.
Another recent example of a narrative is the hype around AI coins. The story here is that AI is the future, and the best way for crypto traders to speculate on this is through unrelated AI-based crypto tokens like $FET$, which has rallied 875% so far.
In conclusion, narratives can be a powerful tool for traders looking to make quick gains. However, it is essential to practice caution and have an exit plan. Traders should also practice critical thinking to identify potential narratives and gain an edge in the market.
