In the era of digital finance, cryptocurrency markets do not simply operate on traditional economic principles or discounted cash flow valuation models. According to analysis from Tan Phat Digital, the market is driven by an invisible but extremely powerful force: "narratives". A narrative in the cryptocurrency landscape is more than just a piece of news or a passing trend; it is a set of ideas, beliefs, assumptions and technical analyzes woven together to create a psychological reality that directs capital flows and shapes asset values. Understanding how these narratives form, spread, and decay is key for professional investors to navigate a market dominated by information asymmetry and extreme volatility.
Theoretical Foundations of Narrative: From Narrative Economics to Reflexivity
The formation of narratives in cryptocurrency markets can be systematically explained through the combination of two modern economic theoretical framework: Narrative Economics by Robert Shiller and Reflexive Theory by George Soros.
Narrative Economics and Disease Spread Models
Professor Robert Shiller, winner of the Nobel Prize in Economics, argues that stories have a powerful infectious power similar to biological viruses. They spread in the community through word of mouth, media and social networks, thereby changing individual and collective economic behavior. In the cryptocurrency market, a narrative often starts as an idea "germ" and spreads through the SIR model:
Susceptible: Investors who do not yet know or believe in the new story.
Infectious:Investors who have accepted the narrative and actively spread it through platforms like X (Twitter), Discord and Telegram.
Recovered (Groups that have recovered/left): People who have taken profits, cut losses or are no longer interested in that story when it is saturated.
The "infectivity" of a cryptocurrency narrative depends on the attractiveness of the story, the comprehensibility of the technology and the expected profit potential. Shiller points out that stories tend to explode when they touch on core values such as financial freedom, resistance to the traditional banking system, or belief in the power of disruptive technology. Bitcoin, for example, is a "constellation of narratives" that combines anarchist ideologies, a desire for personal financial autonomy, and a belief in digital scarcity.
See more: Bull Market vs Bear Market
Reflexivity Theory and the "Kardashian Economy"
George Soros's reflexivity provides insight into how narratives create positive feedback loops in crypto. According to Soros, people's perception of the market and their actions in the market are not independent but affect each other in a cyclical manner.
In the crypto market, when a narrative (for example, AI Agents or RWA) begins to attract attention, the prices of related tokens increase. This price increase is not only a result of the narrative but also becomes part of that narrative, reinforcing investors' belief that "this story is real". Soros calls this a situation where prices have the ability to change fundamentals. A project with a high token price will more easily raise capital, attract more talented developers, thereby creating a "reality" that was originally just an "idea".
This phenomenon is likened to a "Kardashian Economy", where projects become valuable simply because they are famous. This financial frenzy provided the activation energy needed to transform industries from theoretical to real growth. However, this cycle also contains the seeds of collapse when expectations far exceed the technology's ability to perform, leading to a "liquidation of trust" phase.
Stages of Narrative Formation in Crypto
A narrative does not appear randomly but goes through a sophisticated structuring process, which Tan Phat Digital classifies into 4 main stages:
Phase 1: Ideas & Technology (Catalyst)
Characteristics: Appearance of a new technology, system upgrade (like Ethereum Merge) or a breakthrough practical application (AI, RWA) Actors: Project team, VCs, KOLs, crypto news sites.
Phase 3: Community Consensus (Consensus)
Characteristics: Trust spreads, community begins to form around the leading story.
Actor: Discord, Telegram communities, developers Invest early.
Stage 4: FOMO & Cash Flow (Capital Flow)
Characteristics: Strong price increases trigger the fear of missing out, large capital inflows push the narrative into an explosive trend.
Actor: Individual investors (Retail), Market Makers, exchanges translation.
The Art of Market Storytelling
As the technology became available, "storytellers" – including venture capital funds (VCs) and influencers (KOLs) – began packaging this information into an accessible narrative. An effective storytelling framework often involves positioning the audience as the "hero", while technology serves as the "guide". Successful projects often must articulate four foundational stories: Origin Story, Personal Story, Team Story and Current Story.
Power Structure: VCs, KOLs and Market Makers
The process of narrative creation is not a purely democratic event but is coordinated by a hierarchy:
Venture Capital Funds (VCs): Usually the earliest people to recognize narrative. The participation of large funds such as a16z or Multicoin Capital acts as a seal of legitimacy.
"KOL Round": A notable phenomenon in the 2025-2026 cycle. This is a special token distribution method, where the project gives preferential investment to KOLs in exchange for heavy promotion. Influence is now considered a tangible type of capital.
Market Makers (MMs): Not only do they provide liquidity, they are engineers who build stability. By minimizing flash crashes, MMs reinforce the narrative about the "safety" and "quality" of the project, creating a Flywheel effect that attracts more investors.
See more: What is Memecoin
Constituent Elements and Strength Measurement Indicators
Below are important On-chain indicators that Tan Phat Digital recommends investors monitor to evaluate the strength of a narrative:
Active Addresses:
Meaning: Measures actual user adoption.
Warning: A decline in active addresses while prices rise is a sign of narrative exhaustion.
Transaction Volume translation):
Meaning: Confirming actual demand for the asset.
Warning: Low volume accompanied by high prices indicates manipulation or lack of broad consensus.
Exchange Inflows/Outflows:
Meaning Meaning: Forecasting selling pressure or accumulation behavior.
Warning: Large cash flow into the exchange is a sign that "sharks" are preparing to take profits.
MVRV Ratio (Market Value / Real Value):
Meaning: Evaluate the degree of overvaluation or undervaluation. low.
Warning: MVRV > 2.0 often shows that narrative has entered the overheating zone and the risk of correction is high.
Narrative Trends 2025-2026: From Speculation to Real Utility
The period 2025-2026 sees a clear shift towards "Quality over Quantity" quantity":
Asset Tokenization (RWA):
Catalyst: ETF, BlackRock BUIDL fund, clear legal regulations.
Goal: Bring liquidity from traditional finance (TradFi) to DeFi.
AI Agents:
Catalyst: Advancement of large language models (LLMs), need for machine-to-machine payments.
Goal: Create autonomous economic entities that execute on-chain transactions.
Privacy / ZK:
Quality Catalyst:Compliance regulations but still need to protect personal data.
Goal: Enable identity verification without exposing sensitive data.
Prediction Markets:
Catalyst: Success of platforms like Polymarket.
Goal Objective:Turning knowledge and belief into a predictive data industry.
Narrative Crypto Case Study
1. Terra Luna & Anchor Protocol: "Fixed Yield" Narrative
Catalyst: Promise of stable 20% yield on Anchor protocol for stablecoin UST.
Development: This Narrative creates massive demand for UST, pushing LUNA price to record high. However, this model lacks real collateral and depends entirely on new capital flows.
Outcome: In May 2022, when trust was broken, a capital flight triggered a "death spiral", blowing away 40 billion USD of capitalization value in just a few days.
2. Truth Terminal & GOAT: Narrative about "Autonomous AI Agent"
Catalyst: Billionaire Marc Andreessen donated 50,000 USD Bitcoin to an AI Agent named Truth Terminal to let it freely carry out its project.
Development: An anonymous developer created the memecoin GOAT and sent it to this AI. Truth Terminal began promoting GOAT through "spiritual" and humorous posts on X.
Impact: GOAT quickly reached a capitalization of nearly $1 billion, making Truth Terminal the first AI millionaire and ushering in the era of AI Agents in crypto.
3. BlackRock BUIDL: Narrative about "RWA Financial Institution"
Catalyst: BlackRock, the world's largest asset manager, launches BUIDL fund on Ethereum.
What's happening: TradFi giant's use of blockchain to tokenize US government bonds provides ironclad evidence for the narrative of real-world assets (RWA).
Impact: BUIDL reached 2.9 billion USD AUM in a short time, becoming an important infrastructure for other DeFi protocols to use real-world assets as collateral.
4. Polymarket: Narrative about "Prediction Market"
Catalyst: The 2024 US Presidential Election.
Development: Polymarket allows users to bet on the election results. Narrative here is "crowd intelligence" and "real data" with higher accuracy than traditional polls.
Impact: Trading volume reached more than 3.3 billion USD. Its ability to react quickly to real events (like attempted assassinations or controversies) has made it a trusted source for the press.
5.
Narrative: Narrative focuses on fairness (Fair Launch) and speed. It removes technical barriers, turning token creation into a form of social entertainment.
Impact: More than 6 million tokens have been created, bringing over $400 million in fee revenue to the platform in just over a year.
6. Solana & Firedancer: Narrative of "Recovery and Performance"
Catalyst: The launch of a new validator client called Firedancer to overcome the Solana network outages.
Evolution: The story moves from "a network that frequently crashes" to "the world's lowest latency infrastructure" capable of handling traffic million transactions per second.
Impact: Help Solana regain the trust of developers and position itself as a true competitor to Ethereum in the 2024-2025 cycle.
7. DeFi Summer 2020: "Yield Farming" Narrative
Catalyst: Compound protocol distributes COMP tokens to liquidity providers.
Development: An open, intermediary-free financial system where users can optimize profits through the movement of capital between protocols.
Impact: DeFi's TVL skyrocketed from 1 billion USD to over 10 billion USD in just 3 months, laying the foundation for the entire DeFi ecosystem today.
8. NFT Boom 2021: Narrative on "Culture and Digital Ownership"
Catalyst: Beeple's auction and the rise of Bored Ape Yacht Club (BAYC).
What's happening: Narrative about turning art, collectible cards and personal identities into unique digital assets on the blockchain.
Impact: Taking crypto out of the purely financial world, attracting the attention of global artists and celebrities.
9. Axie Infinity: Narrative about "Play to Earn" (P2E)
Catalyst: The COVID-19 pandemic caused many people in countries like the Philippines to look to blockchain games to make a living.
Development: The story of a game economy where players actually own and earn money for their time.
Outcome: Unsustainable economic model (Ponzi-like) and Ronin bridge hack caused this narrative to collapse when the number of new players was not enough to offset the token selling pressure.
10. Metaverse Hype: Narrative about "Future Virtual World"
Catalyst: Facebook's name change to Meta.
Evolution: Expectations of a digital space where people live, work and transact. Billions of dollars have been poured into virtual lands in The Sandbox and Decentraland.
Outcome: Narrative collapsed because the technology did not meet the user experience and lacked practical use cases beyond virtual land speculation.
Narrative Trading Strategy from Tan Phat Digital
To be successful in narrative-based trading, investors need a systematic approach:
Forecasting soon: Follow developer discussions on GitHub and reports from VCs. Early signs often appear in niche markets.
Assessing Narrative-Market Fit: A strong narrative must reflect the "temperament of the times". Ask yourself whether this narrative addresses any of the market's greatest fears or aspirations.
Risk management: Use Position Sizing (allocate only 1-3% of the portfolio to the new narrative), set Trailing Stops based on moving averages (EMAs), and pay particular attention to the divergence between social volume and price.
Frequently Asked Questions (FAQ)
Here are 15 common questions to help you master knowledge about Narrative Crypto:
What is Narrative in crypto? They are stories, ideas or beliefs that shape how investors perceive and value digital assets, thereby directing capital flows into specific segments.
Why is narrative more important than technical analysis in some periods? Because crypto is a new market, where prices are often driven by psychology and expectations about the future rather than traditional financial indicators.
How does the SIR spread model work in crypto? It describes the process of spreading from an unknown group (Susceptible), to a group that is "infected" with the idea and goes viral (Infectious), and finally to a group that leaves after the trend is saturated (Recovered).
What is KOL Round? It is a capital round that the project specifically offers to influential people at a low price so they can create FOMO and attract the community before listing the token.
What does Reflexivity theory explain? It explains the cycle: Good narrative increases prices, increased prices reinforce the narrative, creating a boom that far exceeds the actual value.
What does "Kardashian Economy" mean in crypto? Refers to projects that become valuable simply because they are famous and talked about by many people, rather than based on a technological platform.
How to identify a narrative early? Track developer discussions on GitHub, investment activities of large funds (Smart Money) and early on-chain signals.
What are the signs that a narrative is exhausted (Exhaustion)? When the volume of social discussion peaks but the price goes sideways, or when the amount of tokens loaded onto the exchange from whale wallets increases dramatically.
Why do narratives like Metaverse or Play-to-Earn collapse? Due to excessive financialization, users only focus on exploiting value instead of experience, leading to a collapse when new capital stops flowing in.
What is the real role of Market Maker? They maintain liquidity, narrow the buying-selling gap (spread) to create stability, helping investors believe in the liquidity of the project.
What are the four foundation stories a project needs? Origin, Personal, Group and Now.
What is the difference between sustainable narrative and temporary narrative? Sustainable narrative (Durable) often must pass tests of actual user growth and bring about clear technological efficiency.
RWA (Real World Assets) will be a big trend why? Because it connects huge liquidity from traditional finance to blockchain through tokenization of bonds and real estate.
How Yield Farming Powered DeFi Summer 2020? By using governance tokens as rewards for liquidity providers, generating record yields and attracting massive capital inflows.
How to manage risk when betting on narrative trends? You should only allocate a small portion of your portfolio (1-3%) to new trends and always have a clear exit strategy when on-chain indices reverse.
Narrative is the lifeblood of the cryptocurrency market, a mechanism to coordinate capital flows and trust on a global scale. However, as Tan Phat Digital analyzed, as the market matures, narratives are shifting from FOMO-based hype to solutions with real utility. Mastering the art of narrative trading – combining on-chain data and psychological insights – is the key to mastering the future of digital finance.
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