Introduction

When I published the first Crypto Narrative Watch, I made the argument that market narratives are marketing. In other words, when we start to see a narrative emerge, our question has to be “who has incentive for this narrative to become dominant?”

Recognizing market narratives as marketing doesn’t delegitimize them, but simply means we give them less power to influence our actions by remembering that they are all someone’s attempt at self-fulfilling prophecy.

This truth is particularly relevant in the context of today’s bear market. When we last looked at narratives in August, prices had been trending down for all of 2018 and were well off their 2017 highs, but there was still a sense of forward motion. Projects were continuing to go out and try to raise new capital, funds were (mostly) still shy of redemption timelines, and there was a — perhaps naive — hope around some big event like an ETF turning around the market for an end of year rally.

Today, crypto winter has set in. Public fundraising has ground to an absolute halt, and SEC enforcement action is starting to catch up to ICOs-past. The 2017 vintage of crypto hedge funds is staring down the barrel of fund redemptions as lockup periods end. ETFs have all been denied or delayed.

It’s impossible not to feel the cold of crypto winter seeping in, making us sharp and brittle. It’s also very nearly impossible not to feel like we’re still on this side of starting rather than coming up to an ending.

Yet if the narrative risk of buoyant markets is irrational exuberance that comes from an imagined invincibility, the risk of crypto winter is that we lose ourselves in bitterness, schadenfreude, and an inevitable competitive pessimism as people fight to prove their intellectual bonafides with the most gloomy predictions they can muster.

If anything, the marketing battle for control of the narrative matters more now than ever. The narratives that become accepted today will shape not only how we make sense of the last couple years of crypto, but what lessons we bring forward with us. And while it’s important to not overstate how impactful any given narrative is on short term price action, it is true that there are more eyes on crypto today — from the media to prospective institutional payers to regulators — than there were during the last bear market. The narratives that ascend in this period will play a role in shaping if, when, and how those players engage.

Given the amount of money in the institutions circling on the sidelines, the financial stakes of that narrative battle are immense. Those macro incentives, combined with micro incentives at play as many attempt to reestablish their own personal stories to reconcile the post-ICO world, means that the competition around narratives is likely to get even more boisterous.

In that context, I’ve organized the narratives competing for our devotion into two sections this time: Crypto Winter and Invincible Summer. The first are the narratives trying to make sense of the icy brown slush we’re wading through while the second are the (mostly very nascent) narratives competing to set the frame for what comes next.

SECTION 1: Crypto Winter Narratives

The ICO Reckoning (aka the “ICO-TOLD-YOU-SO”)

ICOs have been in a weird place for pretty much all of 2018. Right from when prices started to retreat in January, ICOs had that vibe of the dude at the club frantically trying to rally as many people as possible to go to the weird after hours club that doesn’t serve booze but at least gives you a place to go instead of your trash apartment. It felt, in other words, like the whole Shitcoin Waterfall — from massively discounted first investors to the ICO media junket to retailers in Telegram groups and on Reddit — was living on borrowed time.

The question was, of course, how much time? At the end of Q1 and Q2 big prominent articles came out talking about how ICOs had — mind bogglingly — already raised more than in all of 2017. Even into Q3, people were still talking about and projects planning on ICOs. By the fall, it was finally starting to feel good and done. And in the last month, the early winter has gotten its bite, with an uptick in regulatory enforcement action around some of the most egregious and exploitative promotions. $150,000 in fines and a business time out. How’s that for a major key, eh?

This narrative is more than just ’the end of ICOs’, which would suggest a quiet fade from a strange accident of history. This is a full on reckoning, where projects and people who rather wish they could fade into history will be dragged kicking into the fitful present.

They will be dragged back by regulators, whose jurisdiction and purview don’t particularly care what new phase of the market we’ve moved to. The will be dragged back by civil litigation seeking financial restitution. They will be dragged by publications looking to make their mark and transparency initiatives who want to set the foundation for a new, better industry. The will be dragged by the endlessly long memory of social media.

Make no mistake, this is the narrative of the early part of this crypto winter. Who is held to account, what lessons we learn, and what emerges in ICOs wake will set the stage for whatever comes next.

One last note on Toldyouso-ism. To the extent that the market starts acting like no one understood the risks of ICOs or that failures came out of the blue, there is value in the historical record saying otherwise. The way its occurring most often now, however, is just a big ego stroke. Even holding aside that that’s usually a bad look, it’s actually net harmful to the space because it takes what would be really important lessons and reduces them to a personal trophy.

Competitive Pessimism

Speaking of things that people do in bear markets that is less than helpful… Competitive Pessimism is the attempt to seem smart by predicting more horrible things than the next person. As we’ll see, there is plenty to be down about without the intellectual wangshow that is everyone who was bullish about 37 minutes ago trying to get a bunch of retweets by posting some even more extreme bearishness. For what it’s worth, this isn’t a unique specialty of the crypto industry and happens in all markets. Still, it’s a part of those traditional markets that we’d do well not to import.

ICO Refunds

If the reckoning is the general narrative, ICO refunds are quickly emerging as the specific narrative with the most destructive power. In mid-December, the SEC announced settlements with Airfox and Paragon that included $250,000 fines, registering their tokens as a security and, most importantly, refunding investors (although the claim forms have left some questions about how those refunds will exactly take shape).

Just last week, meanwhile, former crypto VC darling Basis announced that, due to “regulatory headwinds,” they would be shutting down and refunding investors. The joke was quickly made that, even if Basis had spent a bunch of money and could only return 70% of the original $133m they raised, their investors would be coming out ahead of many ICO projects that had lost everything. Of course, some started to ask — what happens if this becomes the norm? What happens if every single project that raised money on an ICO is forced — either by the SEC or by lawsuits from investors — to return the money? The impact on the industry would be absolutely massive. Frankly, the scenario isn’t particularly far fetched.

Fund Withdrawals

The funny-money explosion of capital that characterized the crypto markets in the back half of 2017 wasn’t limited to coins alone. If the projects were one side of the ICO coin, crypto hedge funds were the other. Something on the order of a couple hundred crypto hedge funds were created year. While a small number of those funds are adapting and even thriving in this bear market, the vast majority are not. Many were funded by early crypto money looking to diversify and often investing in small groups that had deal flow exposure to the massively discounted pre-ICO rounds of token projects — regardless of the investing pedigree and acumen of the general partners.

Unlike venture capital, which has decade+ long capital lockup periods, crypto hedge funds — indeed the whole token asset class — was appealing because of its liquidity and potential for fast returns. Hedge funds often had lock up funds of 12–18 months and as early as this spring and summer, commentators started to speculate what impact LPs withdrawing their funds once those lockup periods would have on price.

Over the last few weeks, we’ve started to anecdotal reports of exactly that happening, plus the announcement of some high-profile departures from larger funds. What’s not clear is whether withdrawals are putting or will put pressure on prices, as funds have to sell the most liquid assets they have (which is usually going to be BTC) to cover them.

Adding a final question mark to the crypto hedge fund space, Morgan Creek’s Anthony Pompliano pointed out that many funds won’t even want to continue on. The argument is that funds don’t get their fees if they don’t hit high water marks — and with the markets tanked relative to last year it’s unlikely that their performance will meet it.

None of this is to say that quality funds won’t survive. The best active managers can make money even in bad markets and long-view funds won’t be subject to the same short term pressure. But it is seems likely that many LinkedIn profiles will soon be looking for update.

Futility Tokens

Much of the ICO boom was premised on the idea of ‘utility tokens,’ — in other words, tokens that provided a specific value to the network in which they were used. The designation came about largely as an attempt to define tokens as something other than a useless speculative asset of the type likely to draw the consternation of the SEC. As of late 2018, most of these token designs haven’t panned out, and if the SEC hasn’t necessarily crisply defined a regulatory status for tokens, they’ve made it pretty clear they believe most ICOs were sales of unregistered securities.

In a post called “Futility Tokens,” token mechanism designer Greg Rocco argued that we would begin to see more and more 2017-vintage utility tokens trying to front-run potential SEC action by fundamentally changing their design, in many cases by accepting the securities designation.

Since that piece, there have been numerous examples of tokens doing exactly that, along with a general shift away from the idea of tokens as money in an ecosystem and towards tokens granting rights to participate — either in governance or to do work securing the network.

On the one hand, the vision of useless tokens flopping around trying to figure out a model that justifies their own existence is a crypto winter narrative. On the other hand, good riddance. I’m genuinely excited about the possibilities of network tokenization, and think we’ve forfeited real honest exploration in that space for want of the cheap funding mechanism of ICOs. The further tokenization moves away from capitalization, the more interesting it’s likely to be.

Detokenization

Of course, the scenario described above about the interesting unexplored territory of tokenization only matters if tokenization is still a thing. There is a growing narrative around forking to remove payment tokens perceived to only exist to justify fundraising in the name of better user experiences. Last week, for example Hydro announced that they would be forking 0x to remove the ZRX token. More generally, services are popping up that offer similar or identical value propositions without native tokens. Again with the good commentary, Rocco pointed out, for example, how much-buzzed-about Uniswap is basically Bancor without a native token. There has even been speculation within the Ethereum community about whether there will eventually be forks that remove governance-focused native ERC20 tokens to simply replace them with ETH for a reduced friction experience.

Layoffs

For some observers, the true bear market wouldn’t be about prices declining or even regulatory enforcement. Instead, it would be marked by companies having to shrink in a more direct way. Two weeks ago, Ethereum venture studio ConsenSys announced that it would be laying off 13% of its staff. Any downsizing is devastating to those involved, and shows the real human cost of the market turndown. At the same time, if anything, it’s surprising that it’s taken this long to start to see layoffs kick in. Now that it’s begun, however, it feels unlikely to stop here.

Exchange Manipulation

Exchanges have not escaped heightened scrutiny as the markets have gotten cold, either. A couple major media moments are reflective. The first is Nic Carter’s “The Dark Underbelly of Cryptocurrency Markets”, which explicitly connected the dots between exchanges (who benefitted from both exorbitant listing fees as well as from trading fees), ICO project promoters, and investors looking to turn over their discounted tokens into the retail markets. This piece wasn’t so much about “manipulation” as it was about how exchanges poured gasoline all over the fire of get-rich-quickism.

The manipulation narrative that has risen to the surface is about wash trading and fake volume. These accusations aren’t new. Sylvain Ribes wrote this piece last year analyzing what percentage of volume that was fake. This year, wash trading felt like an open secret for most of the year, but the narrative around it picked up again when Ikigai Asset Management’s Travis Kling went on Pomp’s Off The Chain podcast and implored exchanges to “end the fuckery.”

It’s clear that, whether as an industry we’re paying close enough attention to exchange practices, regulators certainly are. In statements throughout the year, regulators have indicated that actions against exchanges were going to be some of the first and most aggressive they were going to take. Which leads to…

Calling Out Rubbish Metrics

Wash trading matters in part because we look at trading volume as a measure of success. It is a truism that what we measure as success dictates the actions we take. This fact is today causing many to call out the supremacy of many of our most common metrics. Notably, there is a full-scale assault on “market cap” as the leading metric for the health of a crypto network. In the last quarter alone, new, competing concepts including Realized Capitalization and Market-Value-Realized-Value ratio have been introduced to go beyond simply critiquing and actually offer an alternative. Clay Collins and I actually published a comprehensive look at the history, present and hopeful alternatives to market cap. I believe strongly that the better the metrics we use, the better the industry we’ll get.

DEX Skepticism

Nobody is surprised when centralized exchanges make moves that benefit them economically, but the disproportionate power of exchanges in the crypto market has had people looking excitedly towards the times when decentralized exchanges or DEX’s could handle a bigger part of the market’s activity. Then….the SEC went after EtherDelta.

At that point, all the theoretically “decentralized” exchanges started enforcing KYC/AML measures demanded by regulators. IDEX was one of the first to announce compliance, followed notably by ShapeShift. As a long standing institution of the crypto community, the ShapeShift announcement in particular drove home the idea that there hasn’t yet been a truly decentralized exchange. Instead, there are “non-custodial” exchanges — which ultimately don’t solve for censorship resistance.

This could be changing with the emergence of new players like dutchX and Uniswap, that promise a new degree of decentralization.

Tether FUD & Stablecoin Mania

Related to some extent to the exchange questions and accusation of manipulation is the long-standing narrative of Tether FUD. The last three months or so saw a crescendo of this narrative. Some wondered whether the latest spate of Tether FUD was being driven by investors and stakeholders in the raft of alternative stablecoins that flooded into the market this fall, who had an incentive for Tether to fail and for their coin of choice to fill in. This narrative came to a head when Tether actually lost its peg for nearly a week.

Today, the place of stablecoins continues to be an open question. On the one hand, some argue eloquently that they are a better approach to some of the most important problems that crypto is trying to address — that, in effect, a crypto-based easier-to-use US dollar is closer to what the global market that other needs. Another part of the market feels sort of like..we wanted uncensorable, non-sovereign digital money and instead we got KYC’d US-dollar pegged tokens? This will continue to be interesting to watch, particularly as institutions enter and new businesses are built on top of the new stablecoin infrastructure.

Death Spirals For Days

In the last several months, we’ve seen death spiral narratives for:

Ethereum selloffs to bolster struggling ICO treasuries

Bitcoin Miners shutting down rigs because of flailing prices

EOS block producers withdrawing resources from the network

The common thread in each of these “death spiral” narratives is the feedback loop that occurs in decentralized networks when reduced prices lead to network actors withdrawing their resources, which leads to further reduced prices, which leads to further network withdrawals, and so on.

The Ethereum death spiral was the first to crop up — actually making it to the first Crypto Narrative Watch in August. Research has tended to suggest, however, that ICO selloffs aren’t a major driver of price action — and are reactive to rather than shaping the broader market.

The Bitcoin mining death spiral narrative is, on first glance, complicated. There have been some dramatic visuals of Chinese mining shutdowns released, giving the credence to worries about Bitcoin’s health. At the same time, there are countervailing forces. The first is that there are many miners willing to run at a loss because mining isn’t just about operating expenses but about recovering capital expenses, and shutting down entirely may be worse than mining at a loss for a period. The second and even more important counterweight is the difficulty adjustment built into Bitcoin that ensures that as miners leave the network, difficulty is adjusted down to accommodate and incentivize new miners coming back in.

EOS and other proof of stake systems have no such difficulty adjustment, which creates a scenario in which prices falling underneath the threshold where it is profitable to be a block producer means that only a small group of highly resourced BPs will be able or willing to continue mining at a loss, effectively increasing the centralization in the system. Whether this actually comes to pass remains to be seen, but it will be interesting to watch and has implications not just for EOS, but for all POS systems confronted with bear markets.

State Power Crypto

Every new technology represents both a force to undermine and displace the current power as well as an opportunity to be co-opted to consolidate that power. To date, cryptocurrencies have been largely a force for the expansion of individual liberty, sovereignty and freedom. A decade in, however, the autocrats are learning. Venezuela is effectively ground zero for this war for the crypto soul.

On the one hand, Venezuelans are looking to Bitcoin and other cryptos as a bulwark against deflationary currency. Even as I write, AirTM is airdropping tens of thousands of dollars of crypto directly to Venezuelan citizens completely outside of government control. On the other hand, the Venezuelan state’s theoretically oil backed “Petro” cryptocurrency is nothing but a further tool of control and oppression. Worthless in any international sense, the government is forcing usage of the Petro, even going so far as to replace money in pensioners savings accounts with it.

What’s more, it has been reported that Venezuela is partnering with a Chinese firm on a social credit system designed to track citizen behavior. Indeed, if Venezuela is where much of this battle for crypto’s soul is taking place visibly, much of the bigger battle is likely to take place in China. Recent reports suggest that the Chinese central bank is considering issuing its own cryptocurrency, which would create a massive new opportunity for citizen surveillance.

From a long term global macro standpoint, state power crypto is as important a narrative as there is.

SECTION 2: Invincible Summer Narratives

Yes, this section title is a reference to every emo kids favorite Camus line: “In the midst of winter, I found there was, within me, an invincible summer.” Sue me.

Privacy Tech

Given that our last Crypto Winter narrative was State Power Crypto, it seems only appropriate that we begin the “Invincible Summer” narratives with the counterweight to state power — privacy tech. Privacy Tech isn’t new, but deserves a mention among emerging narratives due to how much advancement the space has seen this quarter and how much momentum and buzz there is going into next year.

Wasabi Wallet has been leading the charge to make Bitcoin transactions anonymous. October saw both Monero (Bulletproofs) and Zcash (Sapling) complete upgrades that significantly improve efficiency around confidential transactions. In the same month, Grin launched its fourth testnet — which it intends to be the last before main net launch. These technologies are significant for more than their specific native implementations. Ethereum is looking at zk-snarks as an opportunity for scaling. MimbleWimble implementations like Grin in particular are capturing the attention of the broader crypto community and creating space for Bitcoiners to discuss privacy features, as well.

And just because all this might not be enough to drive home the point, here are even more privacy related happenings:

The Starkware lecture about ZK Starks was “the most packed” at Devcon4

AZTEC Protocol bringing privacy to Ethereum transactions

Privacy-centric services like Brave and DuckDuckGo are seeing increases in use

In short, between the top side pressure of State Power Crypto creating more of a reason to care, and the bottom up evolutions of the technology, I expect the privacy narrative to pick up even more strongly in the months ahead.

Sustained Developer Interest

One of the truisms of investing is that those who want to know the future of a space should “follow the talent.” In that context, it’s worth asking: has interest in crypto from a talent standpoint? The short answer is: it doesn’t seem so.

Generalized Mining

One of the clearest emerging narratives from the past few months has been around the idea of Generalized Mining. While the term is still a bit up-for-debate, the idea is that crypto networks create demand for a variety of new types of participation and network building, from mining to staking to running nodes and beyond. These activities represent modes of participation that are required to make decentralized networks function securely, and at the same time, represent opportunities for value creation.

This, understandably, has caught the attention of investors who are questioning whether deploying capital alone is enough in the context of cryptoasset networks and who are looking at generalized mining type activities as a way to generate alpha. At the same time, as some have pointed out, the implications are much more fundamental and have to do with how work is organized and rewarded without traditional organization structures.

In short, the narrative around generalized mining that matters is the idea that decentralized networks only work when we participate in them. Which brings us to our next narrative.

Plug and Play Nodes

The participation required to make decentralized networks work is getting a hell of a lot easier. There is a major emergent narrative around simplifying how people participate in network building activities.

The Coinmine One

This is happening through hardware, like the Casa Node for lightningand Coinmine’s Coinmine One — which is both a simplified mining rig and plans to enable Lightning node and staking features in 2019.

It’s also happening through software, through mining-in-the-background programs like Honeyminer as well as through Lightning node managers like Joule. Then of course there are champs like Pierre Rochard with his Node Launcher. The thread that runs through all of these platforms is that collectively they reduce the barrier to entry for real active participation in crypto networks. The more people feel empowered to participate, the more decentralized the network becomes, the more resilient and anti fragile it is.

Usability & UX

Wrapped up in the products mentioned above is a set of assumptions about usability and user experience that run counter to the historical attitude of the bitcoin and crypto space, which viewed difficulty of use as something like a badge of honor. Today, that attitude is being replaced with a belief that, for crypto-based products to move beyond early adopters, they have to have user experiences commensurate with the quality of centralized applications. While this is sort of a “duh” idea, it seems to me that it signals a permanent shift in design philosophy that will have implications for the products that come online in the coming months. An example of one of the leaders in helping articulate that thinking is MyCrypto.com’s Taylor Monahan:

Distribution Beyond Sales

One could be forgiven for not realizing that the original stated purpose of token sales wasn’t to raise an ungodly warchest for the fun of mismanaging it down to zero, but instead as a mechanism to overcome the bootstrap problem that makes it hard for young networks to grow to critical thresholds. As the ICO days get really, firmly buried in the junk heap of history, projects are returning to different approaches to egalitarian network distribution and building that involves rewarding people for work and participation. This narrative is happening a little now but I anticipate will pick up hugely in the next quarter thanks to Handshake coming online and the Grin main net going live.

Open Finance

Open Finance / Decentralized Finance have an interesting place in terms of narratives at the moment. On the one hand, their emergence has been subject to extreme scrutiny by, in particular, the Bitcoin community, who feel that they represent an attempt to shift the Ethereum/smart contract narrative away from the mushroom cloud of ICOs. On the other, there is no denying that there is serious, interesting activity happening around areas like crypto-collateralized loans. For example, currently 1.5% of ETH is locked up in Maker CDPs, and between early November and December, $28m in Maker loans were issued. For my part, I think that the emergence of an open financial infrastructure that can improve access and efficiency around things like loans is incredibly valuable, and will be a part of the landscape going forward, whether its on Ethereum now, Bitcoin or another chain in the future, or all of the above.

Governance

The last quarter has seen an undeniable uptick in the conversation around protocol governance. Part of this is that prominent figures like Vlad Zamfir are writing more about it. But a bigger driver is the fact that numerous on-chain governance systems — from EOS to Tezos to Decred are starting to actually come online, taking what was once a theoretical exercise and placing it firmly in the realm of reality. As this happens, the market has its first chance to price the value of governance.

Many noticed over the course of the last week the prominent forking of the 0x protocol to remove the ZRX governance token. Wherever one stands today, 2019 is poised to be an interesting experiment in how much people value the ability to shape the direction of the protocols they’re involved in.

Institutionalization

The institutionalization narrative has been on a low hum throughout the entire year. Indeed, one could argue that the promise of the institutional ‘herd coming’ just around the corner was even a partial driver of the run up in 2017. Today, there is, if anything, a bit more skepticism than in the past. The prognosis and outlook for the Bitcoin ETF seems worse to many folks than it did a few months ago, and some are even skeptical of the value to Bitcoin if it were to come to pass.

At the same time, it is undeniable that 2018 set up 2019 to be very interesting in terms of broader institutional engagement with crypto. Between the first moves from major endowments (Yale, Harvard etc) to get involved in the space through crypto fund investments, to major players like New York Stock Exchange owner ICE launching Bakkt and Fidelity Digital Assets, there is going to be movement. From a narrative perspective, in some ways the most interesting thing will be how the market responds. If a big launch like FDA is greeted with boredom, it could actually be more damaging by promulgating a narrative that even the “herd coming” doesn’t matter in this market.

Anti-Authoritarian Crypto

If State Power Crypto is my pick for the Crypto Winter narrative with the most long term impact, I’m very glad to see the pickup of its natural enemy narrative around anti-authoritarian crypto. The most obvious example of this narrative comes in the efforts surrounding Venezuela. AirTM is organizing a $100,000 airdrop targeting direct distribution of $10 worth of crypto to 10k families. Coinbase announced its own $10k initiative with GiveCrypto. While these efforts have drawn some criticism that they are prioritizing the marketing value over the human value, they still represent a movement from rhetoric to action in the narrative of crypto providing a bulwark against oppression.

From a media perspective, the Human Rights Foundation’s Alex Gladstein has been speaking eloquently about anti-authoritarian crypto in interviews with Epsilon Theory and on What Bitcoin Did. In particular, he explains why when it comes to anti-authoritarianism, Bitcoin remains the most important asset in the space.

It feels to me like we’re officially in the contemplative vortex that happens when you combine the end of the year with a bear market.

In moments like this, I think it’s worth asking why we’re here. It’s worth reminding ourselves of the version of the future we’re trying to build.

I believe that the coming years are going to see a battle between State Power Crypto and Anti-Authoritarian Crypto. I don’t think that the winner is a foregone conclusion, but I do believe that the privacy tech and growth in tools for people to truly participate in crypto networks orient us towards the good.

Thanks for reading the latest crypto narrative watch. Let me know what I missed on Twitter @nlw and in a couple weeks I’ll update this post.