Taking SOS, DOGE, and others as examples, why is attention said to be the only scarce resource in the cryptocurrency industry?

Author: Cobie, a well-known Twitter KOL

Original Title: 《Tokens in the attention economys》

Compiled by: Dong Yiming, Chain Catcher

People often talk about the scarcity of cryptocurrencies. Whether it's through NFTs enforcing digital scarcity or the idea that "there are 55 million millionaires, but only 21 million bitcoins."

In reality, the only scarce resource in cryptocurrency is attention.

Risk-seeking capital is certainly not scarce. People who joined cryptocurrency in the summer of 2021 are raising billions of dollars to explore the "metaverse" and decentralized Ubers. A billion dollars is no longer considered a lot of money.

Cryptographic assets are also not truly scarce. Bitcoin and Ethereum are scarce due to their capped supply or deflationary token design, Crypto Punks are scarce because their supply is limited and fixed, but the number of things you can speculate on in cryptocurrency is constantly increasing and theoretically endless. More specifically, billions of dollars chasing risk are not entirely used to purchase crypto OG projects.

Yes, there are only 10,000 CryptoPunks. But there are also 10,000 BAYC, MAYC, a bunch of cool ArtBlocks, CoolCats, Meebits, and Hashmasks. Of course, Ethereum launched EIP1559, burning billions of dollars worth of ETH, and over time, its scarcity is increasing. But if people feel it's too late to hold ETH now, there are still AVAX, SOL, LUNA, ONE, NEAR, and even ADA.

Over time, truly valuable crypto assets have proven to be very scarce. The number of crypto assets that have outperformed Bitcoin over more than one bull/bear market cycle is limited, and most tokens have completely vanished. After the frenzy, people will wake up starkly. Recovering from the manic episode. Reflecting on the decisions made during this out-of-body experience, tinged with reality and shame. Capital will return to value. And for investors currently basking in excitement, the "value" pool may be much smaller than previously imagined.

Attention

Attention is a form of "currency" on the modern web. Web2 companies discovered this long ago. Users pay for services with their attention. Companies capture this attention and eventually sell something to users at some point. Often, the companies themselves are not specifically selling anything; they merely act as brokers between user attention and businesses that sell things.

The idea of attention as currency is even more apparent and direct in token economies. Every day, there are over 50 IDOs happening, all competing for your funds and trying to add you to their communities. In the past 12 months, airdrops have been continuous, providing economic rewards to users who use and support their products.

Traditional companies might pay you $5-10 to use their products. After signing up, you get a $10 discount on your first Uber ride. In web3, the competition for attention is so fierce that nine-figure reward programs have become the new norm, and five-figure user airdrops are not uncommon. Every video ad from a crypto YouTube KOL costs five to six figures. Attention is extremely scarce and in high demand.

Attention-Based Asset Valuation

In my previous article, I wrote that the bull market crypto market resembles a video game more than an investment. If cryptocurrency is a large multiplayer game scored in dollars, then attention determines many short-term sub-strategies.

Most people playing multiplayer crypto games cannot adequately assess the technical and fundamental merits of projects themselves. Instead, retail investors heavily rely on signals and social proof in their decision-making.

If you overly simplify crypto prices to some equation of suppliers/sellers and demanders/buyers changing over time, you can explore the implications of attention scarcity.

Clearly, if demand increases or sellers decrease, prices will rise. But the potential factors affecting demand and supply do not change as quickly as participants play the video game of the crypto bull market.

More specifically, the value creation from protocol development and builders occurs over a timeline of years, while the operation time of "trading players" in a crypto bull market is at most a few weeks, and often shorter.

Attention is the only factor affecting supply and demand variables that changes at the same pace as "trading players," as it is directed and controlled by participants.

Favoritism

In the stimulating phase of a bull market, excellent participants do not try to buy the "best" assets. Instead, they try to purchase assets that are about to cross the attention chasm or realize their valuation potential.

Note: Winners refer to winning projects, niche refers to niche projects, rekt refers to failed projects, Retail Trap refers to retail traps.

Excellent traders know they want to buy "Winners" for maximum returns. They want to buy projects that will transition from "niche" to "Winners." They are even more willing to buy projects that have a chance to shift from "Rekt" to "Retail Trap," even though they know this is obviously riskier, as the likelihood of a bad project becoming popular is lower. Projects can also shift from Rekt to niche projects through product pivots, technological changes, or leadership changes. Traders know that any project moving up or left in the above diagram offers opportunities.

"Winners" are the best assets for long-term investors and retail, as they are easily identifiable. However, for "crypto players" who trade daily, they are likely to lack relative opportunities as they may be getting closer to market averages, while excellent traders aim to significantly outperform market averages. A representative example of a "Winner" is Ethereum. Of course, Winners also have downside risks, as over time, with changes in the cryptocurrency landscape, they can slowly turn into "niche" or even "Rekt."

"Retail traps" may also lack relative opportunities compared to market averages but carry more risk than "Winners," possibly due to poor technology or teams and worse long-term prospects. They may become good projects, but the chances are slim and may take a long time. The best-case scenario is that they continue to approach market averages. The worst-case scenario is that they transition from Retail Trap to Rekt as the market realizes they are a bad project and they lose popularity.

As projects gain popularity and recognition, they will be favored by traders. This "favoritism" period is when asset valuations change the most.

Once a project is favored, the number of market participants holding that asset will increase to saturation. Once saturated, it will require (a) growth in the entire cryptocurrency market for that asset to continue to grow, or (b) continued improvement in the fundamentals behind the asset relative to the market. This is why holding "Winners" (or "Retail traps") during the stimulating phase is not ideal for the most hardcore "crypto players," as (a) and (b) act too slowly for these video game addicts. There are huge opportunities in the crypto market, and thus the opportunity costs are equally massive.

Excellent crypto players try to find projects that are far below their potential valuations and then sell these excellent projects as they approach their potential valuations. They are looking for better trades within the "Winners" category in the coordinates.

Long-term investors care less about the game. They are happy to buy "Winners" and bet on these projects, expecting them to grow with the overall market or become increasingly important over time.

SOS, Loot, BAYC

There are many examples of suddenly injecting attention into the market.

The recent SOS airdrop is worth pondering. SOS was airdropped to users based on their previous NFT purchase history on Opensea. This is interesting because providing a certain amount of free funds to almost every serious crypto "player" is a great way to quickly raise the attention of all crypto players.

Keep in mind that at this moment, SOS has no product or fundamentals; it is purely a speculative market catalyzed by the crowd's desire for OpenSea tokens or competitors.

When players' attention turns to SOS, they have three main choices:

1. Sell their airdrop tokens for dollars or ETH

2. Hold their airdropped tokens and see what happens

3. Buy more SOS from airdrop sellers

When attention shifts to this new market, crypto players will ask themselves, "How can I make money from this new thing?" This is, of course, the ultimate meaning of video games. If enough people decide to take actions (2) and (3) such that the price in (3) is greater than the price in (1), then the price of SOS will rise, and the SOS chart will look good.

If the chart looks good, more people will talk about SOS, showing the same decisions to more people and a new group. Now, market participants who have never used OpenSea or have not fully utilized OpenSea for a good airdrop must decide from the following two directions:

1. Buy SOS and participate.

2. Wait or completely ignore this market.

Some of these people will choose (1), which in turn will further accelerate the price. As prices rise, people are happy to make money and continue to talk about this trendy new thing.

However, ownership has drawn attention, and the project quickly transitioned from niche/rekt popularity/recognition levels to Winners/Retail Trap levels.

As prices rise, more people will be happy to sell their airdrops. As the chart stagnates and attention wanes, the number of newcomers willing to hold SOS decreases. With SOS's performance becoming less flashy, it suddenly becomes just a token without a product, and few people are talking about it, slowing the asset's spread. Because the initial level of attention is unsustainable, most of the remaining attention comes from existing holders.

Once an asset enters the awareness of many players, it becomes much easier for all players to rethink this asset, but achieving sustained attention without products and users is much more difficult.

I think you could argue that Loot may have followed a similar blueprint to some extent. This may also explain why this year's best-performing NFT—BAYC—was able to quickly surpass the floor price of Punks, while competitors launched around the same time became worthless. BAYC focuses on building community by creating value for the community, and the participating community becomes a permanent driver, generating sustained or increasing attention.

Doge

Dogecoin is another interesting focal point in 2021.

Historically, Dogecoin has had quite frequent fluctuations relative to Bitcoin. However, from its inception until the end of 2020, these fluctuations remained within the same range. You can see in the chart below that from 2014 to the end of 2020, it essentially displayed a zigzag movement for about seven years.

When people learned about Dogecoin, they had two choices:

1. Buy Dogecoin
2. Ignore it

It can be imagined that the decision ratio remained basically unchanged over seven years. Assuming that out of every 100 people, 90 ignored it, while 10 bought Dogecoin.

Then, in 2021, a new attention catalyst was introduced. Elon became the cheerleader for Dogecoin, changing two things:

1. More crypto natives were persuaded to buy Dogecoin
2. Brand new market participants were persuaded to buy cryptocurrency for the first time, starting with Dogecoin

Thus, when Elon began to drive up the price of Dogecoin, it was actually a very interesting moment in the market. You could ask yourself: if Elon continues to attract attention, what is the maximum audience he could cover? How would the buy/ignore ratio above be affected?

Thinking about it this way makes it very easy to bet on Dogecoin in some identity. If he continues to push the price up, the increased attention will significantly change the supply-demand relationship in favor of Dogecoin holders—perhaps you could estimate a 5x or 10x upside. If he doesn't, you might lose 33% of your investment. This way of looking at risk/reward is unbalanced.

However, ultimately it felt like almost everyone in the world who might decide to buy Dogecoin already knew about it. At this point, attention was at best stable, as the saturation of people who understood Dogecoin had occurred, and those persuaded to buy it had already done so. Now attention was focused on confused observers and those who had already purchased as much as they were willing to buy. The rate of change in attention decreased, leading to far fewer new participants willing to buy, and it had become the sole focus of the remaining holders.

As ownership and valuation drew attention, savvy traders began to sell their tokens.

ADA

Cardano is another interesting example. Although the core argument behind the asset is the same, its performance throughout 2021 was starkly different from Avalanche, Solana, and Luna.

In the early stages of the bull market, Cardano garnered widespread attention. It became a favorite token among crypto YouTubers, with all the well-known names and faces listing it as one of the top three assets. Of course, the founder himself is also a crypto YouTuber, with Charles's videos often reaching 50,000 viewers.

However, since the beginning of 2021, ADA has dropped 93% relative to SOL.

Perhaps this can be explained in the same way we described SOS or BAYC.

When projects gain a large amount of attention beyond ownership, they are often repriced upward. By the end of 2020 and early 2021, Cardano was the leader among retail "Ethereum killers." Additionally, the bull market had just begun, so many new participants were entering the market, further increasing attention.

But throughout the year, other L1 companies, such as Avalanche and Solana, created vibrant and engaging ecosystems—similar to BAYC's approach. They continuously gained greater thought-sharing and attention from users, developers, and speculators. New projects and money-making opportunities were rapidly launching on these L1s.

These communities became eternal drivers, and since crypto players do not like to be idle, these DeFi/game/any projects became a positive feedback loop of sustained attention. Due to attention scarcity, all these L1s were competing for thought-sharing simultaneously. Solana and Avalanche won users' attention, which was a loss for other L1s.

Cardano was very popular, but since users currently cannot do much there, and there is no ecosystem composed of crypto players living on Cardano daily to earn points in crypto games, it feels more like it has transitioned into a "Retail Trap" rather than a "Winner."

Conclusion

Attention is the only scarce resource in cryptocurrency.

When evaluating crypto assets or playing "large multiplayer crypto trading video games," the rate of change in attention and the saturation of ownership are useful indicators to observe or estimate.

The best traders are looking for assets that are relatively less popular—if they can cross the chasm from obscurity to popularity, their valuations have significant room for growth. When ownership draws attention, they will sell it.

Holding "Winners" during the shaking phase only applies to those who are mentally stable, functional, and balanced in life. Perhaps one day I will become one of them.

Oh, and don't listen to most crypto YouTubers. They are converting your attention into products for their advertising business.

Other articles by Cobie:

《How to Optimize Crypto Investment Strategies Using Sub-Strategies?》

《How to Build Investment Decisions Based on FDV and Token Unlock Events?》