Crypto is back - how can you pick the most relevant assets? (2/3: activity & narrative)

Given the size of the investment universe, conducting thorough research is critical for investors seeking to add crypto to their portfolio. Part one of this series on selecting the right assets explored how fundamental analysis can be applied to digital tokens. This second part explores how a project’s activity and the narrative around crypto, fuelled by social media and the latest trends, can help guide investment decisions.   

Project activity

One of the most widely used metrics to measure a project’s activity is Total Value Locked (TVL). TVL is the total amount of crypto that has been deposited or ‘locked up’ in a decentralised finance (DeFi) platform or app, such as peer-to-peer lending, staking (contributing to the governance of a protocol like Ethereum) or providing liquidity to support trading on a decentralised exchange.  

TVL is considered a key indicator of a project’s health. After all, investors are more likely to lock up their funds if they believe a project is robust and secure. On the other hand, they’ll withdraw their funds when something goes wrong- users of DeFi platform Mixin Network withdrew $200 million in two days after it was hacked in September 2023.

DefiLlama is the crypto industry’s most trusted resource for measuring TVL. According to the site, the total TVL for the 3,500 projects it tracks is $115 billion (as of April 9th, 2024), but it also lists the amount by individual project. As of April 9th, 2024, liquid staking protocol Lido has the largest TVL at $34.8 billion, followed by restaking service EigenLayer with $13.7 billion.

The Network Value to Transactions (NVT) ratio is another useful metric which some investors consider the crypto equivalent of the price-earnings ratio favoured by legendary stock picker Warren Buffet. NVT assesses a token’s value using its utility, measured by transaction volume, to help investors understand if the token’s market capitalisation is justified. A high score suggests the token is overvalued and vice versa. To calculate the NVT, divide a token’s market cap by its transaction volume, listed on CoinMarketCap.

Wormhole is further resource for investors who want to track the transfer of funds between chains. For instance, in the last seven days, $77.5 million has left the Ethereum network, with the majority transferred to the Sui blockchain ($36.9 million). 

Social media engagement

Tesla founder Elon Musk has a curious relationship with Dogecoin, a cryptocurrency which was inspired by a meme and launched as a joke in December 2013 but has grown to a market cap of $28 billion (as of April 9th, 2024). Musk’s first involvement with Doge came in 2019 when he tweeted an article about internet money with the caption ‘Dogecoin rulz’. Within a week, Doge’s market cap rose from $292 million to over $400 million. The effect was even greater in response to a tweet in February 2021 featuring a rocket ship and captioned simply ‘Doge’, indicating Musk believed the price was going ‘to the moon’, a popular expression used by the crypto community to describe a strong rally. Doge’s market cap soared by $2 billion. 

This account demonstrates social media’s power and influence in the world of crypto. While Musk's motivation for promoting Doge was unclear- he denies intentionally manipulating the token- platforms like Twitter can provide investors with valuable insight into market sentiment, an indicator of how the market feels about an asset.  

"Social media helps you better understand the conversations a particular community is having about a project and can be a reasonably accurate indicator of sentiment,’ explained Alwin Peng, co-founder of the decentralized exchange Vertex Protocol, in an interview with Forbes. ‘I wouldn't rely solely on social media as a trading strategy. Still, it can certainly play an important role if used as part of a broader plan.’  

However, investors need to be careful about what sources they trust. In March 2023, the Securities and Exchange Commission (SEC)- the agency responsible for regulating the US markets- fined several celebrities, including actress Lindsay Lohan, for failing to disclose that they were paid to promote cryptocurrencies. Social media also helps to promote ‘pump and dump’ schemes, which blockchain analytics firm Chainalysis estimates could have involved more than half of the new tokens launched on Ethereum in 2023.

Investors can use social media tools such as LunarCrush to track crypto market sentiment, while the Crypto Fear and Greed Index, developed by software platform Alternative.me, incorporates tweets into its score. 

Narrative

Investors should monitor the latest trends in the Web3 ecosystem for clues about which crypto to add to their portfolios. Here are three examples:  

• Gemini’s 2024 Crypto Trend Report highlighted several use cases that could benefit from combining artificial intelligence (AI) and blockchain technology. Blockchain networks can provide computing power to AI models and securely store the data used to train them. As the data stored on a blockchain is publicly viewable, these models would be more transparent.

• Tokenization of real-world assets (RWAs) such as securities, artwork and even intellectual property increases liquidity, improves accessibility and streamlines transactions. Supporting this trend is the growing adoption of blockchain technology by traditional financial institutions. Research by digital asset manager 21.co estimates that the market for tokenized RWAs could be worth $10 trillion by 2030.

• Gamefi is a term used to describe games built on the blockchain. They allow players to earn rewards that they can spend in-game, trade with each other or exchange for fiat currency, which explains why they’re sometimes referred to as play-to-earn (P2E). Business Research Insights predicts the sector will be worth over $90 billion by 2031.

Useful resources to keep track of trends include CoinGecko’s crypto market cap by category and CoinShares Digital Asset Fund Flows report, which tracks flows into and out of investment products offering exposure to crypto.

Conclusion

Activity and narrative are important influences to monitor when evaluating a crypto investment opportunity. TVL is one of the most popular metrics used to track activity because if users are prepared to deposit funds on a dApp, it’s likely in good health. NVT is also informative as it incorporates transaction volume. 

In terms of narrative, social media provides a way for investors to tap into market sentiment, but it can be misleading if bad actors hijack the conversation. Investors should also keep track of the latest developments in the Web3 space. Projects integrating AI, tokenizing RWAs or building P2E games may be worth monitoring.