Well-known Twitter KOL Cobie: How to optimize cryptocurrency investment strategies using this strategy?

Author: Cobie, a well-known Twitter KOL

Original Title: “Trading the metagames”

Translated by: Gu Yu, Chain Catcher

Participating in the crypto market during the thrilling phases of a bull market is more akin to playing modern video games than investing.
Most competitive modern video games have a constantly evolving metagame. The metagame can be described as a subset of the game's fundamental strategies and rules, which is necessary for playing the game at a high level.
Metagame
In League of Legends, the metagame frequently changes as developers buff or nerf champions, items, and abilities. Sometimes assassins are very strong, and at other times the best way to play is to use a specific subset of very powerful "jungle" champions. Because certain champions are strong, other champions that respond well to these meta champions also become popular, as they are well-suited to exploit the weaknesses of these overpowered champions as a "counter" strategy.
I don't play Magic: The Gathering, but the internet tells me that the metagame is determined by powerful/popular decks, banned/restricted card lists, and the best responses to those powerful and popular decks.

With all other variables being equal, understanding and leveraging the metagame gives players the best chance to win the game.
In the crypto game stimulated by the bull market, there is also a metagame. Understanding and grasping the metagame is not necessary to achieve some victories, but it is crucial for consistently winning at the highest levels of competition.
Ethereum Killers
Sometimes the metagame is obvious and persistent: throughout 2021, there was a very clear "Ethereum killer" metagame. Alternative smart contract platforms remained one of the best trades of 2021. The "Sol & Luna & Avax" metagame persisted and strengthened almost all year, and their popularity led this metagame trend to spill over into obscure or fringe L1 projects. You could ask, "Which L1s have not yet risen relative to the market average?" Participants in this metagame might not even know what L1s do or whether they are truly good protocols.
Due to Ethereum's high fees, this metagame has been persistent. The crypto market is a video game that market participants want to play: they don't like to sit idle during a bull market. They want to take action and seize opportunities. For many, Ethereum is too expensive. Until this situation changes, this metagame is likely to remain strong.
NFT Minting
Some metagames are fleeting and unsustainable.
For a period in 2021, minting new NFTs was a popular metagame. The popularity and success of Crypto Punks inspired projects like Hashmasks and Bored Apes; in turn, their success fueled a meme trend among market participants who confidently sought the "next big profile picture NFT series." These mints were oversubscribed, leading to rampant speculation in the secondary market, with people missing the chance to buy "rare" items after minting. The profits from early NFT minting further boosted players' confidence. Players began to view minting these projects as "risk-free."
Of course, none of these projects were the next BAYC. At best, they were uninspired trend followers, and at worst, they were cash-grabbing scams. The real sober demand in the secondary market was nearly zero.
Naturally, if the best use of capital is to be a buyer from minting to selling, the market will quickly discover that in 99% of cases, those buying in the secondary market are losers. The buyers in the secondary market dried up, making those buying from minting to selling the losers. Suddenly, this trend cannibalized itself with an unsustainable incentive structure.
The biggest winners of this trend were those who understood the metagame and the incentive structures behind it.
Evolution of the Metagame
If you look back over the past few years, the metagame has evolved through many iterations.
The summer of 2020 was the summer of DeFi, categorized by yield farming and the ultimate food tokens. By the end of 2020, Bitcoin dominated, leading to a revival of "blue-chip" DeFi, spearheaded by Aave. NFTs flourished, with NiftyGateway sales being highly profitable. There was a season of altcoins, an L1 season, and another NFT season, but this time dominated by OpenSea. At one point, there was an Art Blocks season and a trend of "very old NFTs being good." The alt L1 season evolved into an alt L1 ecosystem season, with BSC, Avax, and Luna coins experiencing varying degrees of ecosystem prosperity. The performance of SOL ecosystem tokens was not impressive. OHM forks eventually became a metagame.
You will notice that it is possible to win the crypto game by completely ignoring this ever-changing metagame. However, to play at the highest level and maximize victories, you must repeatedly identify and leverage hotspots in the flow of funds between assets.
Perhaps more importantly, the biggest losers form when players mistake the current metagame for something else. Anyone who thought the metagame at the beginning of 2021 was actually a long-term investment proposition ultimately lost -80%. Or they over-invested in the four-line NFT PFP (Profile Picture) trend, which became illiquid and irrelevant.
Typically, metagames start with long-term investment themes, gradually gain popularity, and end with a frenzy of imitation.
Is it enough to understand the metagame?
I think for some market participants, simply following the ever-changing metagame is sufficient. Especially for those who can control their impulses or are naturally skeptical. I have seen many people who can spot trends, jump in, take substantial profits, and move on without turning their industry into a church.
However, for most people, understanding the incentive mechanisms behind the metagame may be more important.
If you are playing League of Legends, you can do well by knowing that a champion named Nocturne is currently the strongest character in the version. You can simply play it until it no longer appears in the meta and gain a slight natural advantage from the champion's power.
However, if you understand why Nocturne is strong in the version and the changes in the game that lead to the power boost, you will be able to identify scenarios to leverage these advantages, traps to avoid, and generally how to maximize this unfair advantage to win. You can also be the first to know when this advantage is gone (due to changes in the game) because you understand why the metagame exists.
In cryptocurrency, understanding the dynamics of why or how the metagame works is far more important than understanding it in League of Legends.
Sol DeFi vs. Avax DeFi
A simple comparison between Avax DeFi and Sol DeFi is a good example of why understanding the incentive structures of the metagame is important.
From a certain dimension, these two things look the same. The hypothetical investment arguments are indeed the same.
Avalanche is a smart contract platform considered an Ethereum killer and has been one of the best-performing projects this year. Native AVAX DeFi is an opportunity to enter DeFi early in the new ecosystem. If Avalanche is the ultimate winning L1, then AVAX DeFi is a good choice.
Solana is a smart contract platform also considered an Ethereum killer and has been one of the best-performing projects this year. Native SOL DeFi is an opportunity to enter DeFi early in the new ecosystem. If Solana is the ultimate winning L1, then SOL DeFi is a good choice.
So why did Avalanche coins make so many CT (Crypto Twitter) traders wealthy while Solana stole your SOL? Aren't they the same thing, betting on DeFi and replacing Ethereum?
Well, "early" does not mean buying the token on day one. "Early" refers to buying the token at a valuation below its potential.
The Solana ecosystem has its own "very high FDV" sub-metagame, where the only truly early participants are those who funded the seed rounds.
The tokenomics of the Solana ecosystem benefit founders and financiers, but this means that the valuations of these projects are as if they have already succeeded, while many projects need to grow into these valuations.
The popular Avalanche token is more community-oriented and started at a reasonable valuation, meaning that as the Avalanche user base grows, you can benefit from this growth-driven valuation.
This is a simple example, but it illustrates how understanding the dynamics behind the metagame can give those hurt in Solana DeFi more confidence in Avax DeFi.
Observing Winners and Solving Problems
Typically, crypto metagames stem from success. Something works well, and it inspires new founders and investors.
Ethereum achieved tremendous success. It inspired thousands of founders and enabled a vibrant and interesting on-chain ecosystem. Ethereum's success created millionaires among its believers and supporters.
Typically, crypto metagames can also be initiated by failure.
Ethereum failed to scale in a way that allowed ordinary people to use the chain. The costs of using L1 are prohibitively high, while L2 is very new and has its own user experience issues.
The "Alt L1" metagame is rooted in Ethereum's success and enabled by its failures.
"Winners" are good catalysts for the metagame. People are inspired by the success of projects, and they want to find similar things. Founders decide they can build something similar, but better! Investors want to get in early on the next version of this great idea.
The success of Axie Infinity sparked a wave of capital flowing into Gamefi. AXS not only became one of the best-performing assets of the year, but other theme-related assets also began to perform well, even if they lacked the same metrics or use cases to support their valuations. It spawned an entire metagame. Gamefi became popular.
Problems and failures are also significant catalysts for the metagame. Everyone feels the pain of problems and can easily see a better world if those problems are solved. Therefore, they are eager to buy solutions early. Often, the winning solutions are not yet clear, but this is to be expected, as it is never clear when arriving early.
Observing winners and identifying problems in crypto can be a way to identify potential metagames early.
Community > Problems
Sometimes the metagame simply arises from the community's desire to enable like-minded individuals early. New market participants simply refuse to buy wealthy OG asset bundles and instead choose to create their own value.
Trends like DOGE, SHIB, BSC, BAYC, AVAX, GME, etc., can be seen as having this element. They see certain things succeed, and they just decide, "We are not playing their game; it's our turn to get rich."
Perhaps each generation chooses to exit the previous generation's Ponzi scheme and instead decides to create its own Ponzi scheme.
Non-narrative Metagames
Metagames in the crypto industry also do not rely on narratives of crypto assets.
For a time, coins listed on FTX almost always went up because they injected attention into new assets during a bull market.
For a while, there were those who were pre-running Binance and Coinbase token listings. They figured out which tokens were going to be added to major exchanges through insider information, API leaks, or any means, bought the asset early, and sold it upon listing.
Track VCs that already have metagame moments. Just don’t follow Barry.
On-chain analysis and observing whale wallets that already have metagame moments.
There is also a metagame in token presales, where bad projects can raise funds by guaranteeing profits for early supporters. They raise funds at extremely low valuations, offer very short vesting periods, target investors with large audiences, and hold IDOs at the 20x valuations gained by early supporters.
They raise funds, seed buyers can almost guarantee profits, and early supporters with large audiences can say, "This is what I invested in" as disclosure (which completely distorts the risk imbalance between their investment and the potential investment of their audience, but I suppose it’s legal) in this case, the founders win, and early supporters may win. The metagame is relative to everyone else.
Using the Metagame
Like video games, using the metagame in the crypto industry can provide players with the best chance of winning. Identifying the metagame can help you find the simplest and most profitable opportunities at any given time.
A trader named TheDogKennel created a portfolio of every dogecoin-like project after the early Doge surge. He discovered that there might be a dogecoin metagame and turned $15,000 into millions. Perhaps the smartest stupid idea I have seen all year.
Traders who saw "DeFi summer" style dynamics on Avax were able to buy and hold the best native Avax dex project tokens from below $0.01 to over $4 because they understood the metagame and the dynamics behind it.
Identifying the metagame and the dynamics behind it may be the most important skill for any altcoin trader. If you understand the dynamics and incentive mechanisms, you can determine whether the metagame has some positive feedback loop or sustained growth vector. Or you can figure out whether it is a rapidly depleting wildfire that will only lead to its own demise.
Of course, identifying early and buying metagame assets to sell them is the ideal and obvious way to use the strategy. Overall, the most successful altcoin players I have encountered use the metagame to increase their value holdings over time (i.e., trading metagame assets to stack BTC or ETH).
However, for other reasons, the metagame is also useful.
Sometimes you can simply see that you missed the current metagame asset and use that information to exit positions outside the metagame to preserve value, or just take a break and recharge your mental energy. As the metagame and attention shift to new things, capital flows out of previous metagames. People sell the last metagame they prepared for the next version. This is a video game. Players want to play; they don’t want to sit idle.
Traders use the metagame to exit/rebalance long positions. If you hold a large position in a certain token, and it suddenly becomes a metagame asset, even if you have a long-term argument about the asset, sometimes selling it during a boom and buying back after the strategy shifts
may be a good idea to increase your position size.
The metagame can be used to help decide which assets to trade on derivatives or to build pairs around. In 2021, when you thought the overall market looked good, the longing for metagame assets or the best-performing assets brought traders huge returns. In the abyss of June, the returns from SOL and LUMA significantly outperformed the BTC and ETH you were longing for.
Many traders are stuck in various unrealistic metagames. Many spent a year drawing Bitcoin dominance charts and modeling potential advantage runs as they referenced metagame models based on 2017. Other traders spent a year relying on the Stock2Flow model to inform their trades. Identifying these mental models/metagames can help you think more independently about what is happening and recognize cognitive biases.
The worst thing you can do is dive headfirst into a thriving metagame. Therefore, if you have considered trading 5 or 6 times, weeks/months have passed, and you finally muster the courage to do it: it may be too late. It no longer feels risky, which means it may be the biggest risk.
Typically, when the metagame is common knowledge among all participants, the real metagame has already shifted to something else.