A couple of years ago I ran into a dear friend who was preparing to launch a new crypto project, and he asked for my advice in helping it take off. In the end it fizzled and last I looked the project was lagging behind, however, my friend and I had a long conversation prior to launch and this talk helped crystalize, in my mind, a key indicator of the future success of a crypto asset, a narrative of price appreciation (NPA).
A narrative is nothing more than a story, in the case of what we are discussing here, it is a story that you tell yourself about how a particular crypto asset will appreciate in the future. Now this may sound simplistic, I mean, even scamcoins (perhaps especially scamcoins) develop for their users convoluted narratives of how they are going to go from one dollar per coin today to a thousand dollars per coin tomorrow. But the secret, as in most things in life, is in being able to separate fact from fiction.
Swiss based ETP enters the Crypto trading market | Data Driven Investor
Although there is hardly ever a dull moment in the financial market specially after the introduction of…
Back in 2014, I invested in a coin that used to be called XCoin (now Dash). My first investment was tentative, this was experimental crypto and there was no clear narrative of how this coin was going to go from a few cents back then to a peak of 1500 USD reached back in 2017. But as the months passed and XCoin became Darkcoin, lead developer Evan Duffield put out a White Paper I still keep in my files, describing an innovation called “masternodes”.
Now, why is this interesting? Because this is the point where a narrative of price appreciation for Darkcoin (later Dash), crystallized in my mind. You see, to run a masternode, which is essentially a special type of full node, one had to lock up 1000 Dash, but in exchange for doing this, masternodes received payments from the network for executing certain services; if I recall correctly, this amounted to about a 10% return on investment early on.
This was interesting but Darkcoin’s NPA crystalized for me only later in the paper: Masternodes would also get to vote on the allocation of 7000 coins mined in a special type of block once per month; this “treasury” was designed to help fund development projects for the Dash ecosystem.
I must say that this second function of masternodes sealed the deal for me, the NPA was clear: I am invested in a crypto that pays me 10% a year to hold it, and which I’m pretty sure will be here at least in the foreseeable future, because it will not run out of money or developers, it can pay for both out of its own blockchain. According to our investment philosophy, a coin with staying power and growth power is bound to increase in price over many years. I began to buy in earnest.
When I discovered Bitcoin back in 2011, I was coming at it with previous experience as a PayPal and Credit Card merchant selling virtual goods; let me tell you something about that, if you sell virtual goods these companies will NOT protect you, no matter what evidence you have, if a malicious customer claims fraud, you will get a chargeback. I have been scammed of tens of thousands of dollars this way. So when I saw that Bitcoin settlements were irreversible, and took only 10 minutes to settle for near-zero cost, I could easily see an NPA where internet merchants and others requiring cheap and near-instant transactions (such as remittance users) would flock to Bitcoin. So I bought some (and started a couple of Bitcoin businesses).
The NPA is a sieve to help you sort through crypto-assets looking for investment-grade material, but unlike other tools we have discussed on our blog previously, it is also a very personal one because it is based on your own experiences and biases.
In my own investing for example, I ignored Ethereum early on, despite being aware of it and well informed, because my personal narrative is heavily weighted to assets with large network effects, therefore I tend to only invest in coins which are intended to be used as money (what could possibly have higher network effects than money?) so I missed the Ethereum boat. That’s okay however, crypto investing is not about buying the nicest boat every time, it is about never buying the boat that sinks in the middle of the lake.
The NPA must make objective sense, what I mean is that you should be able to extrapolate the NPA from a particular blockchains’ white paper application and have it be equally valid in the real world. In the examples above the applications are: “I can earn dividends (masternode payments) from my invested asset”, and “part of asset earnings are reinvested into the business (treasury)”. If you can’t explain it to yourself in these simple terms, chances are your NPA doesn’t make sense.
So going back to my friend, yes there was some bad luck in launching his asset, it happened at the tail end of 2017 and early 2018 when the market collapsed, but I think it also had to do with them not understanding the importance of this concept. They specifically refused to include any form of staking or price appreciation mechanism for providers of layer 2 services or verification oracles (this was a complex project) due to their fear of running afoul of SEC regulations.
This is, of course, reasonable, but it left investors scratching their heads, what kind of story can you tell yourself, to invest in a project where you have no way of earning extra returns, where the project does not develop a self-perpetuating virtuous cycle when there are myriad alternatives that do? Take it from me, if you are starting a new blockchain, build in a way for users to provide tier 2 and other services to each other, and pay them to do this. Your coin will thrive.
There is, of course, a bit more to this NPA thing, but I will delve deeper into it in future articles. For now, it is important that you understand that this is one place where your expertise and unique experiences will serve you well. Although top traders picking ten coins using this method would likely pick the same 4–6 to start, the rest would vary wildly, and that’s just fine.
A free copy of Pablo’s well-reviewed book, focused on the principles of crypto investing: