The investment logic in crypto markets based on Expectations

Published in
14 min readMar 3, 2023


Pricing of risk assets

Cryptocurrencies, as a new type of risk asset, have increasingly gained more attention from traditional capital/funds. However, the pricing of risk assets is determined by the risk-free rate and risk appetite on the denominator side, as well as the performance on the numerator side. Cryptocurrencies follow this pricing logic. As shown in the graph, the risk-free rate on the denominator side represents the cost of obtaining currency and is mainly influenced by the monetary policies of the US Federal Reserve. Market risk appetite is an emotional indicator that is difficult to quantify. While other markets use the VIX index to assess market risk appetite, it only describes market risk appetite from the dimension of volatility and has certain limitations. On the numerator side, the profitability of cryptocurrencies is still in its early stages, and its externalities are not yet clear. Its self-generating ability is weak, and external capital is needed to develop technology, nurture the market, and expand the market. Therefore, only a very small number of protocols have stable long-term cash flow capture ability, which is reflected in the pricing on the numerator side.


After understanding how cryptocurrencies as risk assets are priced, it is important to also consider another influential force or determining factor in the market, which is expectations. The market prices in various expectations in advance, and these expectations ultimately affect the price of cryptocurrencies by influencing the numerator and denominator of the pricing formula.

According to Soros’s reflexivity theory, the market has a mainstream bias and trend which is an aggregation of various market forces after playing games. This mainstream bias guides the flow of speculative capital in the market, and the short-term impact of speculative capital inflows is an increase in prices. The aggregation of various expectations and Soros’s mainstream market bias describe the same essence from different perspectives, which is that speculative capital will be influenced by one or more market expectations.

Given that the current cryptocurrency market is mainly dominated by speculative capital, it is crucial to anticipate various expectations in advance and discover expectation gaps, which is also the main way to gain market alpha.

Expectations and prices

The market often prices in various expectations ahead of time, including positive and negative news, and investors are constantly trying to anticipate these expectations and position themselves accordingly. As a result, it’s common for investors to “buy the rumor, sell the news,” as they may have already priced in the expected positive outcome and decide to take profits once the news is officially announced. This creates a dynamic and interdependent relationship between market expectations and prices. Over time, these expectations may become exaggerated or tempered by market sentiment and imagination, creating a pendulum-like effect that swings between extremes until reality sets in. If reality confirms or exceeds the expectations, this positive spiral may continue, but if reality falls short of expectations, the spiral may reverse direction, leading to a negative spiral. This cycle repeats itself continuously as market expectations evolve with new information and events.

Classification of expectations

We can categorize expectations based on their impact on pricing formula, as well as the time horizon over which their impact is expected.

The time horizon can be divided into short-term, medium-term, and long-term expectations. In terms of their impact on the pricing formula, expectations that affect the denominator, such as risk-free rates, are defined as macro expectations. Expectations that impact the denominator’s risk preferences are defined as liquidity preference expectations, and expectations that affect the numerator’s profits are defined as growth expectations. Categorizing expectations helps us accurately locate the expectations generated by a particular event and assist in our trading decisions. Of course, the market is a dynamic process, so multiple expectations can coexist simultaneously, or one event can have multiple types of expectations. From a time perspective, expectations are also dynamic; a short-term expectation can evolve into a medium-term or long-term expectation, and vice versa. Therefore, when we identify potential market expectations or expectation gaps, we need to determine which type of expectation they belong to in terms of their impact on the pricing formula and their time horizon. We also need to consider their potential evolution over time. Only by doing so can expectations truly help us make informed trading decisions.

In the current cryptocurrency market, expectations are mainly distributed in the denominator, specifically regarding expectations about risk-free rates and risk preferences.

The categories for the cryptocurrency market

Various expectations ultimately affect a specific sector of the market, and are ultimately reflected in the rise of prices. That is, the mainstream expectation guides speculative capital to flow into a specific sector of the market, ultimately leading to the rise of that sector, and with the change of expectations, causing speculative capital to transfer between various sectors and form a sector rotation effect. Therefore, it is crucial to classify the market based on expectations in order to capture various expectation gaps in advance. The crypto space is a complete ecosystem based on the mapping of the real world on the blockchain, and there is no unified standard for classification, and the same protocol may have multiple attributes. Below is a simple classification of the crypto market based on some common attributes and the protocols involved in each category. The classification is based on the four layers of blockchain technology, blockchain networks, smart contract and tools, applications, payment gateways.

Blockchain networks

As the infrastructure layer of blockchain, it is primarily composed of various blockchain networks. The classification at this level is mainly based on the layers, including layer0, layer1, layer2, and interoperability.


As the infrastructure layer, L0 refers to protocols such as Celestia, Polkadot, Cosmos, etc.


L1 mainly refers to some public chains, BTC, ETH, BSC, and some new public chains published recently, such as APT, SUI, SOL, etc.


Layer2 exists as a sub-chain attached to the main chain, mainly used to carry the transaction volume of Layer1 and play the role of the execution layer. Currently, the mainstream Layer2s are all sub-chains that expand Ethereum, including Arbitrum, Optimism, zkSync, StarkNet, Polygon, and more.

Cross-chain bridges

Polygon, Arbitrum, and Optimism each have their own official cross-chain bridges, which enable the transfer of assets between the Layer 2 protocols and Ethereum.

The middleware layer

The middleware layer mainly provides various general services and functions for upper-layer applications. The provided general services and functions include, but are not limited to, security audits, oracle services, index query services, API services, data analysis, data storage, basic financial services, digital identity, DAO governance, etc. The middleware can exist in various forms, including on-chain protocols, off-chain platforms, or off-chain organizations, including centralized enterprises or decentralized autonomous organizations (DAOs).

Smart contract audit

Many smart contract audit services are provided by companies specializing in security audits. Some well-known audit companies include CertiK, OpenZeppelin, ConsenSys, Hacken, Quantstamp, as well as domestic companies such as SlowMist, ChainSafe, and Paiduin.


Oracle serves as an intermediary between on-chain and off-chain data. The classification of oracles can generally be divided into DeFi oracles, NFT oracles, SocialFi oracles, cross-chain oracles, privacy oracles, credit oracles, and decentralized oracle networks. Some specific oracle projects include CreDA, Privy, UMA, Banksea, DOS, NEST, and Chainlink. Among them, Chainlink is the leading decentralized oracle network and has introduced a series of products and services such as Data Feeds, VRF, Keepers, Proof of Reserve, and CCIP.

On-chain data services

On-chain data services are also crucial middleware that solve the complex data querying problem on the blockchain. The main representatives in this area are The Graph and Covalent. The Graph’s implementation mainly involves customizing listening to on-chain data and mapping it to custom data for storage, making it easier to query. Covalent, on the other hand, encapsulates many commonly used and widely used data into a unified API service for users to query.

API providers

There are also other API providers that address different needs, such as NFTScan, which focuses on providing NFT API data services; Infura and Alchemy, which primarily provide blockchain network node services; and API3, which aims to create decentralized API services.

On-chain data analysis

On-chain data analysis is another important data-related service. Key players in this area include Dune Analytics, Flipside Crypto, DeBank, and Chainalysis.


Data storage is a crucial middleware infrastructure in the crypto market, with protocols such as FIL, AR, BTT, and IPFS involved


As the cryptocurrency market expands, the demand for privacy is also growing. Privacy-oriented protocols include XMR, ZEC, DASH, and XFT, among others.


Rollups is a technology for scaling on blockchain that reduces transaction costs and increases throughput by “rolling up” a large amount of transaction data and submitting it to the blockchain. Protocols that use Rollups technology include IMX, LRC, and others.


The application layer is the most vibrant layer in the Web3 ecosystem, with a variety of different DApps. This layer can be broadly classified into four categories: NFT, DeFi, GameFi, and SocialFi.


DeFi is divided into many sub-sectors, including stablecoins, exchanges, derivatives, lending, aggregators, insurance, prediction markets, indexes, and more.

Algorithmic Stablecoins

Algorithmic Stablecoins are a relatively new concept that use algorithms to control the supply of stablecoins. Players in this field include UST, FEI, AMPL, ESD, BAC, FRAX, CUSD, USDD, USDN, and more.


The insurance in traditional finance is very big,but its market share in the crypto industry is still small. The demand for DeFi insurance is considerable, but the high development and design barriers, as well as the low liquidity, have slowed down the development of the insurance industry in DeFi. Therefore, the insurance is still in early stages, with projects such as Nexus Mutual, Cover, Unslashed, and Opium.


DEXs (decentralized exchanges) are the cornerstone of DeFi and the most valuable sector in terms of market capitalization. It can be divided into spot DEX and derivative DEX, where the latter primarily trades perpetual contracts or options. In terms of trading mode, DEX can be classified into two types: Orderbook mode and AMM (Automated Market Making) mode. Orderbook mode DEX includes dYdX, apeX, 0x, and Loopring. On the other hand, AMM mode DEX is more diverse, with major players such as Uniswap, SushiSwap, PancakeSwap, Curve, Balancer, Bancor, GMX, and Perpetual.

Perpetual futures

Perpetual futures, also known as perpetual swaps, are a type of futures contract that are leveraged trading products with no expiration date. Several well-known decentralized exchanges that offer perpetual contracts include dYdX, ApeSwap, GMX, and Perpetual. These exchanges allow traders to speculate on the price movement of various assets, such as cryptocurrencies and commodities, with leverage, which can amplify both profits and losses.


Options are a significant financial category in the DeFi ecosystem. Some notable protocols in this field include LYRA, DPX, and Hegic. These protocols allow users to buy or sell the right to purchase an asset at a specific price in the future, providing flexibility and risk management to traders.

Lending & Borrowing

Lending & Borrowing is an important foundational infrastructure in the DeFi field, involving protocols such as Compound, Aave, Maker, Cream, Liquity, Venus, Euler, Fuse, and more.


Synthetics is a distinct branch of financial derivatives in the DeFi space, and the protocols involved in this category include SNX, Mirror, UMA, Linear, Duet, Coinversation, and more.

Interest rate derivatives

Interest rate derivatives are mainly developed based on the interest rates of crypto assets to provide different types of derivative products that meet the varying needs of DeFi users for fixed income. Major players in this field include BarnBridge, Swivel Finance, Element Finance, and more.


DeFi aggregators are also divided into several types: DEX aggregators, yield aggregators, asset management aggregators, and information aggregators.

DEX aggregator is primarily a tool that aggregates multiple DEXs and searches for the best trading path through algorithms. Popular DEX aggregators include 1inch, Matcha, ParaSwap, and MetaMask Swap, which is built into the MetaMask wallet.

Yield Aggregator is a DeFi tool that helps users optimize their yield farming returns by automatically routing their funds to the pools offering the highest yield. Popular yield aggregator protocols include Yearn Finance, Alpha Finance, Harvest Finance, Convex Finance, etc.

Asset management aggregators primarily monitor, track, and manage the assets and liabilities of DeFi users. Zapper and Zerion are the main players in this category.

Information aggregators, such as CoinMarketCap, DeFiPulse, DeBank, and DeFiPrime, are also important in the DeFi ecosystem.

Prediction markets are data-based markets that can be used for betting and predicting upcoming events. They are one of the earliest use cases of the Ethereum ecosystem. Major protocols in this category include PolyMarket, Augur, Omen, and more.


These are four index protocols in DeFi:

  • DPI (DeFi Pulse Index)
  • sDEFI (Synthetix DeFi Index)
  • PIPT (Piedao DeFi Index)
  • DEFI++ (PieDAO DEFI++)

These protocols allow users to gain exposure to a diversified portfolio of DeFi assets through a single token, which represents a basket of different tokens. They are designed to provide investors with broad market exposure and reduce the risks associated with investing in individual DeFi assets.


Liquidity Staking (LSD) is a widely adopted DeFi category that allows users to stake their assets and provide liquidity to a protocol in exchange for rewards. Some of the prominent protocols in this category include Lido (LDO), Ankr, Beacon, and many others.

DeFi 2.0

DeFi 2.0 is an innovative development built upon the foundation of DeFi, featuring new protocols such as SPELL, UQC, ALCX, TOKE, and more.


GameFi is a new category that combines gaming and finance, and it has become synonymous with Web3 games. Previously, Web3 games were often referred to as blockchain games or chain games.

Some of the top applications in this category include Decentraland, The Sandbox, Illuvium, Star Atlas, and Alien Worlds, among others.

Move to earn

Stepn, FITFI, SWEAT, etc.

Play to earn



SocialFi is the organic integration of social media and finance in the Web3 space. It refers to decentralized social networking and has become a popular concept in the past two years. Currently, there are not many well-known projects in this category, with Lens Protocol being the current leader.


Twitter is an important channel for Web3 investors to obtain information, and Musk’s tweets can also influence the price trends of MASK and DOGE.

Content Creation

Content creation is a sector that has yet to gain much traction in the crypto space. Protocols with content creation attributes include Mirror, CHZ, SNT, and Mask.


Many protocols currently have decentralized governance, including UNI, CRV, and AAVE.


Based on the various use cases of NFTs, they can be roughly classified into the following categories: collectibles, art, music, film and television, games, sports, virtual land, finance, brands, and DID.


The Metaverse has always been an important sector in crypto, and the protocols involved include APE, MANA, and SAND, among others.

AI & Big Data

AI and big data may be an important field in the future of crypto, and the protocols involved currently include GRT, AGIX, FET, and Ocean.


VR and AR technology are the technical foundation for implementing the Metaverse, and the protocols involved include CEEK, HIGH, WILD, and KLO.


Protocols mainly involved in the music sector include Audius, Opulous, Corite, Rocki, and ANML.

Media and Video

The media sector’s main protocols include Theta, Enj, TRX, SNT, and Rndr.

Entertainment There is a wide variety of protocols in the entertainment sector, with main protocols including APE and WAXP.

Payment gateway

Payment gateway is the top layer of the Web3 architecture and the entry layer directly facing end users. This layer mainly includes wallets, browsers, aggregators, etc. In addition, some Web2 social media platforms have also become entry points for Web3.

Wallet Wallets are the entry point into the Web3 world, with protocols involved including TWT, LRC, SFP, liME, and more.

Capture the Expectation and Surprise

To trade successfully, it is important to identify and capture expectations in the market. Expectations are the market’s anticipation of future events, discounted by the probability of their occurrence. These expectations are often triggered by unexpected or upcoming events that affect the sentiment of speculative capital and ultimately translate into price movements. Therefore, it is important for traders to be sensitive to external events and to be able to anticipate their development based on logic and common sense.

From the perspective of the pricing formula for risk assets, macro expectations, which are on the denominator side, have a wider and longer-term impact than the other two types of expectations. For the current crypto market, macro expectations for trading may include:

  1. The Fed slowing down rate hikes, which is already being priced in by the market as inflation data falls.
  2. The Fed maintaining a high interest rate environment without further rate hikes until inflation returns to its target range. This may have a neutral effect on risk assets with respect to the risk-free rate on the denominator.
  3. Continued deterioration of US inflation data, further rate hikes by the Fed, leading to a downturn. This is a negative macro expectation.
  4. Inflation falls, the US enters a downturn, the Fed starts cutting rates in a countercyclical adjustment to address the downturn, and the monetary market environment shifts. This is a positive macro expectation.

The above macro expectations are what may happen in the cryptocurrency market this year. These expectations have an impact on the entire cryptocurrency market and are long-term in nature. Apart from macro expectations, there are also risk preference expectations on the denominator side and growth expectations on the numerator side. The impact of these two expectations mostly occurs within the market and has a relatively shorter time horizon compared to macro expectations.

The impact of the risk appetite expectation on the denominator of the market is often reflected in some narrative within the market, which is often limited to a specific field or track in the market and the duration of its impact is uncertain. For this year’s crypto market, risk appetite-based expectations may include the following narratives:

  1. The Shanghai upgrade of ETH and the resulting liquidity release is a positive expectation for the staking track and has already been priced by the market.
  2. The mid-year ETH Cancun upgrade may bring a positive expectation for the rollup track, but the market has not yet priced it.
  3. Some new technological breakthroughs in the market this year may bring new liquidity preference expectations, including AI, VR, social networking, and other tracks, some of which have already been priced. It is important to keep an eye on these fields.

On the other hand, growth expectations on the numerator side often occur on a specific protocol within the market, which may be a breakthrough in some new technology or a significant protocol upgrade, etc. It is a specific expectation of growth that may bring growth in the future, and its duration is also uncertain. The growth expectation of a protocol mainly depends on the future development roadmap of the protocol. The impact of growth expectations on prices is wide-ranging, and below are a few examples from the perspectives of supply and demand and upgrades:

  1. From the upgrade perspective, the stablecoin that the CRV protocol and AAVE protocol are about to launch is a growth expectation.
  2. From the supply and demand perspective, the unlocking and release of liquidity and halving can also bring changes in supply and demand and affect the growth expectation on the numerator side. For example, the delay in the unlocking of dYdX, which is expected to happen at the end of 2023, brings an expectation of growth due to its impact on supply and demand, and the 2024 halving of BTC will also affect supply and demand, bringing growth expectations.

Capturing expectations and suprise is a long-term, interactive process with the market that requires independent thinking, rationality, and continuous exploration and learning. It demands keen observation and rigorous analysis, and the ability to discern subtle nuances in order to be able to “hear the sound of the grass and leaves to know the passing of the deer, feel the pine wind to sense the approach of the tiger.”


Investing based on expectations is an event-driven trading strategy that differs from value or other investment strategies in terms of its shorter time cycle. The trading style leans towards the left side, following the principle of going against the crowd “Bad Times Make for Good Buys.” This strategy favors a concentrated approach to fund management without excessive diversification. The risks of this strategy mainly come from the accuracy of the executor’s subjective judgment of expectations and the market’s pricing of expectations. To succeed in this strategy, investors need to maintain independent thinking, be rational, and constantly explore and learn. They must possess keen observation and rigorous analysis skills, and have the ability to judge the situation accurately.

By Archimonde & Lizzie Lu

About ZMQ

ZMQ is a Leading Global Quantitative Market Maker and liquidity provider in Digital Assets. Since jumping into the crypto market in 2018, ZMQ has been focusing on providing liquidity globally for token projects and exchanges, institutional crypto investments and consulting services to bring better price discovery, trading executions, transparency to investors and efficient pricing to the market.

If you have any new ideas about crypto market making and liquidity service, please reach out to us at!


Twitter: @zmquant_com




Crypto Market Making | Hedge Fund | Investment | Advisory | Marketing | Web3/NFT/Game/DeFi / Layer1,2