People talk a lot about scarcity in crypto. Whether it’s enforcing digital scarcity through NFTs or the idea that “there’s 55m millionaires but only 21m bitcoins”.
In reality, the only scarce resource in crypto is attention.
Risk-seeking capital is certainly not scarce. People that joined crypto in summer 2021 are raising multi-billion dollar funds to explore “the metaverse” and to decentralize Uber. One billion dollars is not very much money anymore.
Crypto assets are not really scarce either. Of course, this is a little intellectually dishonest. Bitcoin and Ethereum themselves are scarce due to their hard-cap supply or deflationary tokenomic designs; Crypto Punks are scarce because there is a finite and fixed supply; and yes, there will probably only ever be 5,200 Crypto Dickbutts. But the amount of things you can speculate on in crypto is ever increasing and theoretically interminable. More specifically, the infinity-billion dollars in risk-seeking capital are not entirely dedicated to buying the bags of crypto OGs.
There is ample dilution in the destinations for new dollars into crypto. It is more prominent in a bull market — particularly towards the thrill-stages, when long-term value theses seem to retreat from the cognition of money managers that recently discovered themselves to be geniuses.
Yes, there’s only 10,000 Crypto Punks. But there’s also 10,000 BAYC, MAYC, the kennel one, a bunch of cool ArtBlocks and CoolCats and Meebits and Hashmasks and, yeah, you get the picture. Sure, Ethereum launched EIP1559 and they’re burning billions of dollars of ETH and it is increasing in scarcity as time passes. But if people feel like they’re late to ETH, well then there’s AVAX, SOL, LUNA, ONE, NEAR, even ADA.
Over time, the truly valuable crypto assets have shown to be incredibly scarce. Crypto assets that outperformed Bitcoin over more than one bull/bear cycle are limited, most of them died entirely. It’s not unrealistic to imagine that something similar happens again on a medium-term timeline. As exultation abandons us, we will emerge naked and sober. Coming down from a manic episode. Reflecting on these decisions we made during this out-of-body experience with the taste of reality and shame. Capital will return to value. And it’s likely the pool of “value” is much smaller than previously imagined to investors now operating with their euphoria hangovers.
But for now, the brand new $1bn fund managed by ex-Citibank “innovation division manager” turned wagmi-punk-2383, is spoilt for choice in a dilutive and ever-expanding toilet bowl of investment opportunities. They have LPs knocking on their door to take more money, they have 100 founders per day building cross-chain defi metaversal gaming scholarships.
The only thing truly scarce is attention.
Attention is a currency on the modern web. Web2 companies figured this out ages ago. Users pay for a service with their attention. Companies capture this attention to ultimately sell something to the user at some point down the line. Usually the company doesn’t sell something specifically themselves, they just act as broker between user’s attention and businesses with something to sell.
Attention as a currency in the token economy is much more evident and direct. Each day there is 50+ IDOs happening, all competing with each other to take your $ and add you to their community. Airdrops have been flowing non-stop for the last 12 months, rewarding users with financial incentives for using and supporting their product.
Traditional companies will pay you $5-10 to use their product. Sign up, and you get $10 off your first Uber ride. In web3, the fight for attention is so large that 9-figure incentive programs are the new normal, and 5-figure airdrops to users are not uncommon. Crypto youtube influencers are commanding 5 to 6 figure advertising costs per video. Attention is scarce and it is in high demand.
Attention-based asset valuations
In the last post, I wrote about bull-run crypto markets being more similar to a video game than to investing. If crypto is a massive multiplayer game where the score is kept in dollars, then attention dictates a lot of that shorter-term metagame.
The majority of people playing the multiplayer crypto game cannot themselves sufficiently evaluate a project’s technical and fundamental merits. Instead, retail investors reliance on signaling and social proof in decision-making is quite large.
If you over-simplify crypto prices to be some equation of supply/sellers and demand/buyers changing over time then you can explore the impact of attention scarcity.
Evidently, prices go up if there’s more demand or if there’s fewer sellers. But the underlying factors impacting demand and supply do not change as rapidly as the cadence that players are playing the crypto bull market video game.
More specifically, protocol development and builders’ creation of value happens on multi-year timelines whereas crypto bull market trader-gamers are operating on at-most multi week timelines and frequently shorter than that.
Attention is the only factor impacting the supply & demand variables that changes on the same cadence as the players, because it is directed and controlled by the players.
During thrill stages of a bull market, good players are not trying to buy the “best” assets. Instead, they are trying to buy the assets that are about to cross an attention chasm, or realise their valuation potential.
Good traders know that they do want to buy “Winners” to achieve maximum returns. They want to buy projects that will move from “Niche” to “Winners”. They would even prefer to buy projects that have a chance to move from “Rekt” to “Retail Trap”, though they know that this is obviously much more risky, since there is less chance of a bad project becoming popular. Projects can also move from Rekt to Niche with a product pivot, change in tech, or change in leadership. Traders know that any project moving upwards or to the left in the chart above provides an opportunity.
“Winners” are the best assets for long-term investors and casuals, since they’re easy to identify. But for crypto-gamers playing daily, they are very likely to be lacking in relative opportunity, since they will probably grow closer to the market average and good traders are looking to outpace the market average significantly. An obvious example of a “Winner” would be Ethereum. Of course, winners also have downside risk, in that they can move to “Niche” or even to “Rekt” slowly over time as the crypto landscape changes.
“Retail Traps” are also likely to be lacking in relative opportunity vs. market average, but also have more risks than “Winners” since the project has bad tech or a bad team and worse long-term prospects. They could become good projects, but that is unlikely and can take a long time. Best case scenario, they continue to grow closer to the market average. Worse case scenario, they move from Retail Trap to Rekt as the market realises they are a bad project and they lose popularity.
As projects increase in popularity and awareness, they become favoured amongst traders. This period of “becoming favoured” is where asset-valutions experience the most change.
Once a project has become favoured, the amount of market participants that own this asset increases to saturation. Once saturated, it requires (a) the entire crypto market to grow for that asset to continue to grow, or (b) for the fundamentals behind the asset to continue to improve relative to the market. That’s why owning “Winners” (or “Retail Traps”) during thrill stages is less desirable to the most hardcore crypto-game players, since (a) and (b) move too slowly for these video game addicts. There is gigantic opportunity in crypto markets, and thus similarly gigantic opportunity cost.
Good crypto game players are trying to find projects valued much lower than their potential valuations, and then selling those good projects when they approach those valuations. They sit in “Winners” while they look for better trades.
Longer-term investors don’t care so much about the game. They’re happy to buy the “Winners” and bet on good projects growing with the overall market or becoming more important over time.
$SOS, Loot, BAYC
There are many examples of the sudden injection of attention into markets.
The recent airdrop of $SOS is good to consider. $SOS was airdropped by a third party to Opensea users based on their previous NFT buying history. This is interesting because giving virtually every single serious crypto “game player” some amount of free money is a very good way to rapidly increase attention amongst all crypto game players.
Keep in mind at this point $SOS has no product, no fundamentals, it is purely a market of speculative attention catalysed by the crowd’s desire for an OpenSea token or competitor.
When a game player’s attention is directed to $SOS, they have three main choices:
Sell their airdropped coins for Ethereum or USD
Hold their airdropped coins and see what happens
Buy more $SOS from airdrop sellers
When attention is directed to this new market, crypto game players ask themselves “how do I make money from this new thing?” which of course is the ultimate point of the video game. If enough people decide to take action (2) and (3), such that $ from (3) is greater than $ from (1), the price of $SOS will go up and the $SOS chart will look good.
If the chart looks good, more people will talk about $SOS, presenting the same set of decisions above to more people and a new cohort of people. Now, market participants that never used OpenSea, or didn’t use it enough to get a good airdrop have to decide to:
Buy $SOS and participate.
Wait or ignore this market entirely.
Some of these people will pick (1) which in turn causes the price to accelerate further. While the price is going up, people are happy they’re making money, and continue to talk about this trendy new thing.
But, ownership catches up to attention, and quickly the project has moved from the Niche/Rekt level of popularity/awareness towards the Winners/Retail Trap level.
With prices higher, more people decide they’re happy to sell their airdrop. As charts stagnate and attention drops, less new people decide to own $SOS. Since $SOS is less shiny and new, and suddenly is just a token with no product, less people will talk about it and k-factor of the asset reduces. As the initial level of attention is unsustained, the majority of the remaining attention is from existing holders.
Once an asset has entered the consciousness of many players, it is easier to get all players to think about this asset again, but achieving sustained attention without a product and without users is much harder.
I think you can argue Loot may have also followed the blueprint above to some degree, too. And this maybe also explains why the best performing NFT PFP series of the year, BAYC, was able to flip the Punks floor while competitors launched at similar times went to 0. BAYC focused on building a community via building value for that community — and an engaged community become perpetual promoters, creating sustained or growing attention.
Doge was another interesting attention injection for 2021.
Throughout history, Doge pumped relative to Bitcoin quite routinely. However, from its inception until the end of 2020, those pumps stayed pretty much within the same range. You can see the chart below, from 2014 to end of 2020, the chart is basically just sidways zigzagging for 7 years.
When people learn about Dogecoin, they have two choices:
You can imagine that for 7 years, the ratio of decision making remained roughly constant. Lets say for every 100 people, 90 of them ignored it, and 10 of them bought doge.
Then, in 2021 a new attention catalyst was introduced. Elon became the cheerleader of Dogecoin, changing two things:
More crypto-native people were convinced to buy doge
Entirely new market participants were convinced to buy crypto for the first time, starting with doge
So when Elon started shilling Doge, it was actually a pretty interesting moment in markets. You could say to yourself: if Elon continues to draw attention to this, what is the max audience it can reach? How will the buy/ignore ratio above be affected?
Thinking about it this way would’ve made betting on Doge in some capacity quite an easy trade. If he continues to shill it, increased attention will change supply/demand hugely in the favour of doge holders for a while - perhaps you could estimate a 5x or a 10x upside. If he doesn’t, you could probably cut your losses at -33% of your investment. Decent imbalance in risk/reward.
Eventually, though, it felt like virtually everybody in the entire world that might decide to buy doge already knew about it. It was a fucking segment on SNL. By this point, attention is flat at best, because there’s a saturation of people who know about doge and those that would be convinced to buy it have already bought it. Attention is now concentrated amongst puzzled observers and people that already bought the maximum they’re willing to buy. The rate of change of attention has dropped which leads to far fewer new participants willing to buy, and it has become favoured with the only remaining attention from bagholders.
Smart traders start selling as ownership and valuation have caught up with attention.
Cardano is another interesting example. It has performed very differently to Avalanche, Solana and Luna throughout 2021, despite the core thesis behind the asset being the same.
Cardano reached huge amounts of attention as the bull market began. It became a Crypto YouTube’s favourite coin with all the well-known names and faces putting it as one of their top 3 assets. Of course, the founder is kind of a Crypto YouTuber himself, Charles’ streams often reaching 50k viewers.
Yet, since the beginning of 2021, Cardano is down 93% when priced in SOL.
Perhaps this can be explained the same way we described SOS or BAYC.
When projects receive a huge injection of attention which outpaces ownership, they often reprice upwards. Cardano was a leader in retail “eth killer” attention towards the end of 2020 and in early 2021. Plus, the bull market was just getting into gear, so lots of new participants were joining the market adding further attention.
But throughout the year, other L1s such as Avalanche and Solana have created vibrant and engaged ecosystems — similar to how BAYC did. They are constantly acquiring greater mindshare and attention of users, developers and speculators. New projects and opportunities to make money are rapidly being launched on these L1s.
These communities become eternal promoters and, since crypto game-players don’t like to be idle, these DeFi/gaming/whatever projects become a positive feedback loop of sustained attention. And since attention is scarce, all of these L1s are competing with each other for mindshare simultaneously. Solana and Avalanche winning user mindshare can be considered loss for other L1s.
Cardano is very popular, but since users can’t do much there at the moment, and there isn’t an ecosystem of crypto-game-players living on Cardano day-to-day to win points in the crypto game, it feels as though it has transitioned more into ‘Retail Trap’ than ‘Winner’.
Attention is the only scarce resource in crypto.
The rate of change of attention and the saturation of ownership are useful metrics to observe or estimate when valuing crypto assets or playing the massive multiplayer crypto trading video game.
The best thrill traders are hunting for low relative popularity assets that have lots of space for their valuations to grow if they are able to cross the chasm from obscure to popular. They are selling them when ownership catches up with attention.
Holding “Winners” through thrill-stages is only for the mentally-stable, functioning human beings with well-balanced lives. Maybe I will be one of them one day.
Oh and don’t listen to most crypto youtubers. They’re turning your attention into a product for their advertising businesses.