“History doesn't repeat itself, but it often rhymes.”
I found this concept on X this weekend and man, reading about it and then obviously going down the rabbit hole to learn more about it has taught me a lot about narratives in crypto, so now I'm here to share that knowledge with you.
The Boom-Bust Sequence & The Comparison of Narrative Momentum & Price
You already know I'm not an expert on Finance, Crypto, Economics and market trends. I do well for myself and I have some knowledge, but the road to financial independence and economic freedom AKA freedom money is full of experience and new learnings, so while I share information with you, I also learn and re-explore concepts and get to understand them a bit better. That's how it goes with knowledge, it is a constant learning loop.
A constant loop that very much resembles the markets, and it relates closely to cycles, especially but not only, the crypto market cycles. The best part is that you don't need to be an expert to understand the basics of crypto cycles, which not only occurs on a 4 year time frame but also in smaller ones. The concepts below apply both to BTC as well as most of the mid and small mCap coins and maybe even to shitcoins.
The concepts I'm gonna lay down here are Reflexivity, Nomm-Bust sequences, Narrative cycles and Market Lag associated with narratives.
Reflexivity
Reflexivity is similar to a feedback loop, where the output of a system influences its own operation, it involves the continuous cycle of information where the output of a system is fed back into the system as input, and this cycle repeats.
The concept of a feedback loop started in social theory, but then George Soros played a significant role in introducing and popularizing this idea in the financial world.
In social theory, a feedback loop refers to the mutual interaction between individual behavior and the broader social context. Individuals' actions and decisions are not isolated but are influenced by and, in turn, influence the social environment. This idea aligns with the sociological perspective that sees individuals as both products and producers of society.
In finance, Reflexivity is a feedback loop between market participants' perceptions and the actual state of the market. The beliefs and actions of the market participants can impact market prices, and these prices, in turn, influence participants' perceptions and behavior. This creates a continuous feedback loop where perceptions and reality are intertwined.
The phenomena resembles Pavlov's Conditioning experiment where he rang a bell before giving food to his dogs. Initially, the dogs didn't give much of a shit when the bell was rung. With time, the ringing of the bell elicited a response in the dogs and they would salivate at the ringing of the bell (in anticipation of the food. Remember this little story, it'll helps you understand the next topic.
About Narratives.
The narrative is the story the market tells itself to explain movements in price. Understanding narratives goes hand in hand with deciphering the story that the market is painting as well as the story that the participants in the market are telling themselves.
There can be nested narratives for a macro narrative. For example, the macro narrative is the bull market, and the nested narratives are the Bitcoin ETF approval, and the halvening event in three months. A macro narrative can have both many positive and negative nested narratives, and each nested narrative can have their own nested narratives.
But here's the interesting part, the narrative or story being told typically shifts in the other direction before price does, the market takes some time to reflect the narrative shift, it lags.
Another interesting part is that the price action that follows a narrative, tends to react more aggresisvely than the narrative itself, no matter the direction. This is mostly due to the fear and greed factor. A narrative might support a 20% sentiment shift, but the price can go up as far as 40%, for example, and then the sentiment shift makes the price crash harder.
The Boom Bust Sequence
An elementary model of this sequence starts with an underlying trend that is not yet recognized. When the trend is recognized by participants it leads to the beginning of a "self-reinforcing process". This can also be looked at as the narrative/the story being told has shifted in a positive trajectory long before the price decides to catch up. The stronger the "self-reinforcing" process becomes the strong the "reflexive relationship" becomes.
Remember Pavlov?
Initially, during the recent months of the strong uptrend from 15k to 30k per Bitcoin, people were hesitant to "buy the dips" and were expecting a crash to 12k. Over time, more and more participants become complacent in terms of "buying the dips" until it becomes "let me crank up the leverage and long this dip because it's free money". The market participants are willing and more confident to take on more one-directional risk while the gap between the narrative momentum and the price is rapidly closing (and eventually diverging).
As this self-reinforcing process continues, the underlying trend and the prevailing bias become "increasingly vulnerable". When the trend in price can't compete with the prevailing expectations, a correction occurs. This aspect aligns with a stage that is referred to as "First Cracks", this is when the "story gets overcrowded" i.e. early participants of the trend take profit and late participants get shaken out. An investor might think - and we've seen it when the BBC starts telling people to buy crypto - that the trend is over and it is time to get out of the markets and take profits.
But how can this be applied in a practical framework? How can we make money out of it?
Crypto Twitter's sentiment goes along the thought that we are in the "first cracks" phase. Once the price correction of Bitcoin is defended, the only up will continue. Bitcoin is sitting at -18% from the local 49k high, and since the typical bull market pull-backs are in the 20-30% area, so no matter if we get a deeper pull-back from here or not, there is a case to believe that we are still in for a bigger price fall while the macro trend continues on a raise.
A self-reinforcing process undergoes orderly corrections in the early stages, and, if it survives them, the bias tends to be reinforced, and is less easily shaken. When the process is advanced, corrections become scarcer, and the danger of a climactic reversal greater.
The first significant correction is noted to be followed by a hype wave (new highs) and the eventual "peak and turn". This would go hand-in-hand with the continuation of the uptrend and eventual peak euphoria/blow-off top. Good traders will realize there has been a meaningful turn in the narrative here, even when price continues to make new highs.
As long as price continues to rise, most traders will ignore information that goes against the narrative.
Essentially, when a narrative cycle begins trending upwards from the bottom, fair value is lagging behind. This is when assets are at a discount - a concept that most crypto twitter don't understand and every time there's a dip they go oh I'm getting more XYZ tokens at a discount when they don't even know the fundamentals behind the concept and thing that every dip is a discount.
This is followed by a "catch-up" phase and then comes the eventual peak, when the price is hyper-inflated compared to the underlying story leading to the bust. We can draw the conclusion that the lag at the top compared to the underlying story has already shifted direction compared to price which stays going up occurs in part due to the greed of market participants.
This lag also seems to occur at "the bottom" or during meaningful pullbacks over the course of a cycle in the inverse direction due to fear.
Understanding the stories the market is telling itself and learn to identify when the market is falling in or out of love with a narrative.
This is a lot easier said than done.
The goal here isn't to pretend that we can make accurate long-term predictions or that we're savants but more so to be mindful of and try to grasp the behavioral aspect of cycles -specifically reflexivity.