Arthur Hayes: We rely on others to judge whether a narrative is good or bad
We are all speculators. Every moment of our existence in this universe is filled with uncertainty. As we attempt to navigate an unpredictable existence, our brains continually construct probability maps of our environment. Our actions are not based on facts but on probabilistic predictions of various outcomes.
A simple example is the risk of avalanches while skiing.
The optimal slope for skiing is between 35° and 40°, which is also an ideal slope for avalanches. Before starting to ski, my guide will assess the chance of a possible avalanche based on snow conditions, weather conditions, and observations from other guides who have recently skied the same area. If the risk is too high, we don’t ski.
A more common example is taking the elevator versus taking the stairs. The former is faster than the latter. However, elevators are mechanical devices that sometimes malfunction, and malfunctions can result in serious injury or death. You can calculate expected value (probability * outcome), estimate the likelihood of injury or death, and estimate the time and energy saved by taking the elevator up 30 floors.
You are gambling with your life every moment. That's not a bad thing; it's just the nature of humanity's inability to predict the future perfectly. What a terrifying existence it would be if we knew exactly how the future was going to play out. I prefer our imperfections.
Your self-interpretation of certain actions shapes your perception of the risks they pose. I will call it narrative.
For social creatures like humans, narratives are created primarily through the “wisdom of the crowd.” For better or worse, the most powerful stories are the ones that everyone believes.
This narrative is also constructed from objective facts. Facts, in most cases, are discrete events that point to the riskiness of certain actions. It is a fact that avalanches are more common on slopes of 40°. It is also true that people have been injured or killed while riding in elevators.
Everyday conversations and objective facts combine to make up the narrative.
Although the facts are important, it is very difficult for an individual human being to know the exact number of fatalities out of the total number of rides on an elevator. Likewise, it is a challenge to know the number of skiers killed by avalanches on a 40° slope compared to the total number of skis performed on similar slopes. In situations where we are unable to determine exact actuarial data, we rely on others.
In the above-mentioned incident, the actual operation process is as follows:
Avalanches
My guide was experienced and had extensive training on how to determine which slopes were prone to avalanches, and he believed this particular route was safe.
Safety doesn't mean avalanches won't happen; safety means the likelihood of avalanches is acceptably low. So, because of my trust in his training system, which has been refined over time through the experience of thousands of mountain guides, I will follow him down this slope.
elevator
I know that taking the elevator is more dangerous than taking the stairs. But everyone else was taking the elevator. If everyone else rides the elevator, it must be safe. Everyone can't be wrong at the same time. Additionally, there are building regulations that were created using the experience of trained engineers, and the elevator is certified as safe. So, trusting the expertise of engineers I’d never met and the wisdom of the crowd, I felt safe riding the elevator.
The way we allocate probabilities does not depend on facts or technology, but on our perception of the facts and how good the technology is. These perceptions are based on what others say, and we assume they know more than us due to training and experience, that they are telling the truth or that they are speaking of good technique.
crypto world
To relate this to cryptocurrencies, consider the following scenario.
Suppose a new project claims to solve a problem using novel technology. The problem they claim to solve is well known, and the tokens of other projects trying to solve it are highly regarded.
You trust the engineers on the project to be smart and talented enough to solve the problem. You believe this because other engineers who have successfully launched cryptocurrency projects are advising them.
You also have confidence in the team because they graduated from reputable technology-focused universities and have experience working at successful technology companies. Because the narrative is strong (story + technology), you invest. But dig deeper into your thought process, which is more important: story or technology?
The answer is story
Story is more important than technology. Your perceived chance of success is based on other people's perceptions of the problem and other people's perceptions of the team's technical capabilities. Your ability to evaluate technology at a fundamental level is a rare event. This is why you trust others to understand the situation better than you to judge whether the technology has a good chance of solving the problem.
Although, your technical skills are usually not enough to properly evaluate a project, you can easily understand whether a story is good or not. A good story is one that more and more people tell each other. Of course it would be better if the story is conveyed in a positive way. For example, “In this round of the market, all retail investors will switch from CEX to DEX.”
But even if the story spreads in a negative way: "It is impossible for retail investors to leave CEX and switch to DEX.", the story of the migration of trading volume from centralized exchanges to decentralized exchanges still spreads.
I don't care if people believe the story, I just want them to tell the positive or negative twist. Because in this round, you can make more money by holding long-term than shorting, optimism will trump pessimism. It's just the way the human brain works.
What is my job?
While my official title is Chief Investment Officer at Maelstrom, I should change it to Chief Narrative Officer. I tell stories. The better and more concise the story, the faster it spreads. The more viral a story is, the more the tokens adjacent to that story will appreciate.
Maelstrom's finance professionals are graduates of the Wharton School of Business. While we understand the potential applications of Crypto and blockchain technology, we are not cryptographers, decentralized network experts, or have deep technical knowledge of computer science. When we do transactions, we outsource technical due diligence to others who possess those skills.
Others may be top VCs on the list of early investors or well-respected technical advisors on the project. Without these validators, we might be satisfied with the technology because the founders have already launched successful projects.
Our job is to determine which project has the best chance of success in the vertical story. Success depends on macro and micro stories that are widely communicated. You make the most money on a token where the story goes from being thought to “never” to “maybe” happening.
I would rather invest in a token with an expected probability of success of 0.01% and a story that is in the viral growth stage than a token with an expected probability of success of 50% and a story that has entered the common sense stage. If the chance of success goes from 0.01% to just 1% because the story quickly affects the perception of many people, then the investment will grow 100 times.
The macro story tells an observed trend and how this project will capitalize on it. It's more of a story than a trend, as we're extrapolating a small movement into a more uncertain future.
For example, there is a macro story "Retail investors' derivatives trading is shifting from CEX to DEX", and BitPerp is building a Perp DEX. BitPerp’s token will rise because its macro story is currently unknown but has the ability to go viral.
The micro story tells why this particular project will be one of the best in the competition within a specific macro story.微觀故事案例有「BitPerp得到了Arthur Hayes的建議，他幫助發明了Perp交易」，當其他人聽說Arthur參與其中時，他們會假設該項目將得到一些牛X 的建議，以幫助他們擊敗其他競爭project.
I rarely write in-depth micro stories about specific coins outside of Bitcoin and Ethereum. However, it's bull market time. I’ve laid the foundation of the significant forces driving crypto adoption, it’s time to market my assets.
result
Does the result, that is, transaction volume growth, TVL, number of unique addresses, etc., really matter? Yes, they are important, but their importance to the token price depends on which stage of the hype life cycle you invest in.
When investing in a story/trend that you think will happen from "never" to "maybe", the appeal of the project is less important. The market is not expecting much as the market believes that this coin is associated with a trend that is unlikely to grow in the future. Therefore, even mediocre results can be touted as groundbreaking because expectations are so low.
When investing in a story/trend that you think will happen from "possible" to "definitely", the importance of the project's appeal is high. Market expectations are high because they believe in a bright future. Results that were considered surprising at the previous stage are considered mediocre at this stage. Amazing results are not enough; at this stage, a project must be truly revolutionary to meet expectations.
Shitcoin time is up
The purpose of this article is to present to the reader the conceptual framework that guides Maelstrom.
Over the next few months, most of the articles I write will focus on the specific tokens we hold and their macro and micro stories. These tokens have already launched or are about to launch, so I'm working on getting this story out more widely.
I don't care if you buy or sell any of the coins I talk about. What I care about is that I present a story and supporting argument that is so compelling that you will discuss it with others in a positive or negative way.
When I read what I wrote on social media, I know I've succeeded.
Here’s a rough idea of the macro and micro stories I plan to tell in the coming months.
Retail investors turn to DEX: dYdX, GMX, and possibly other competitors
Interest rate swap demand caused by ETH pledge: Pendle
Shitcoin dual-currency derivatives: Krav
DEX chain liquidity is provided by intermediary software for market making: Elixir
Settlement and clearing price on-chain oracle: Flare
Stablecoin for non-fiat reserves: Ethena
Bridgeless cross-chain: Axelar.
reward
Right now, energy and attention are focused on the staggering number of purchases of U.S.-listed spot Bitcoin ETFs. Coupled with the global fiat currency devaluation carnival, it will push the value of Bitcoin to reach unimaginable heights in fiat currency. The upcoming ETH ETF will also push up the price of ETH. I already hold BTC and ETH, I may buy a little more, but overall, my attention is turning to Shitcoin.
Can I buy coins that perform better than BTC and ETH? This is Maelstrom's minimum rate of return. We do this by learning as much as possible about certain projects and telling amazing stories.
This article is reproduced with permission from: PANews
Original author: Arthur Hayes
Review editor: Gao Jingyuan
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