Arthur Hayes Blog: The Altcoin Season is Here, What Are My Picks?

Original Author: Arthur Hayes

Translation: PANEWS

We Rely on Others to Judge the Quality of Narratives

We are all speculators. Every moment we exist in this universe is filled with uncertainty. As we attempt to navigate the unpredictable existence, our brains continuously construct probability maps of our environment. Our actions are not based on facts but on probabilistic predictions of various outcomes.

A simple example is the risk of triggering an avalanche while skiing. The optimal slope for skiing is between 35° and 40°, which is also the ideal slope for avalanches. Before we start skiing, my guide assesses the probability of an avalanche occurring based on snow conditions, weather, and observations from other guides who have recently skied in the same area. If the risk is too high, we do not ski.

A more common example is whether to take the elevator or the stairs. The former is faster than the latter. However, elevators are mechanical devices that can sometimes malfunction, and malfunctions can lead to serious injury or death. You can calculate the expected value (probability * outcome), assessing the likelihood of injury or death against the time and energy saved by taking the elevator up 30 floors.

You are gambling with your life every moment. This is not a bad thing; it is the very nature of humanity's inability to perfectly predict the future. If we knew exactly how the future would unfold, what a terrifying existence that would be. I prefer our imperfections.

Your self-explanation of certain behaviors constitutes your perception of the risks they (will bring). I will call this narrative. For social beings like humans, narratives are primarily created through "the wisdom of the crowd." Regardless of whether they are good or bad, the most influential stories are those that everyone believes.

This narrative is also constructed from objective facts. Facts, in most cases, point to the risks of certain behaviors as discrete events. Avalanches are more common on a 40° slope; this is a fact. It is also a fact that people are injured or killed while taking elevators.

Everyday conversations combined with objective facts form the narrative. While facts are important, as individual humans, it is very difficult to know the exact number of deaths that have occurred out of the total number of times people have taken the elevator. Similarly, knowing the ratio of skiers who have died from avalanches on a 40° slope to the total number of runs conducted on similar slopes is also a challenge. In the absence of precise actuarial data, we rely on others.

And in the aforementioned events, the real operating process is as follows:

Avalanche

My guide is experienced, well-trained, and knows how to determine which slopes are prone to avalanches; he believes this particular route is safe. Safety does not mean that an avalanche will not occur; safety means that the likelihood of an avalanche is low enough to be acceptable. Therefore, due to my trust in his training system, which has been refined over time with the experience of thousands of mountain guides, I follow him down this slope.

Elevator

I know that taking the elevator is more dangerous than climbing the stairs. But everyone else is taking the elevator. If everyone else is taking the elevator, then it must be safe. It is impossible for everyone to be wrong at the same time. Additionally, there are building regulations created using the experience of trained engineers, and the elevator has been certified as safe. Therefore, trusting the expertise of engineers I have never met and the wisdom of the crowd, I feel safe taking the elevator.

The way we assign probabilities does not depend on facts or technology but on our perception of the facts and the quality of the technology. These perceptions are based on what others say, and we assume they know more than we do due to their training and experience, whether they are stating facts or good technology.

Crypto World

To relate this to cryptocurrency, consider the following scenario. Suppose a new project claims to solve a problem using novel technology. The problem they claim to solve is well-known, and the tokens of other projects attempting to solve this problem are highly valued. You believe the engineers of the project are smart and talented enough to solve this problem. You believe this because engineers from other successful cryptocurrency projects are advising them. You also have confidence in the team because they graduated from reputable, tech-focused universities and have experience working at successful tech companies. Because the narrative is strong (story + technology), you invest. But digging deeper into your thought process, which is more important: the story or the technology?

The Answer is the Story

The story is more important than the technology. The probability of success you perceive is based on others' views of the problem and their views of the team's technical capabilities. Your ability to assess the technology from a fundamental level is a low-probability event. This is why you believe others know more than you do to judge whether the technology is likely to solve the problem.

While your technical skills are often insufficient to accurately assess a project, you can easily tell whether a story is good. A good story is one that is shared among an increasing number of people. Of course, it is even better if the story is spread positively. For example, "In this market cycle, all retail investors will shift from CEX to DEX." But even if the story spreads negatively: "Retail investors will never leave CEX for DEX," the narrative of the migration of trading volume from centralized exchanges to decentralized exchanges is still spreading.

I do not care whether people believe this story; I just want them to discuss its positive or negative variables. Because in this cycle, holding long will make more money than shorting, optimism will triumph over pessimism. This is just how the human brain works.

What is My Job?

While my formal title is Chief Investment Officer of Maelstrom, I should change it to Chief Narrative Officer. I tell stories. The better and more concise the story, the faster it spreads. The stronger the story's virality, the greater the appreciation of the tokens adjacent to that story.

Technology Does Not Matter!

The finance professionals at Maelstrom all graduated from Wharton. While we understand the potential applications of crypto and blockchain technology, we are not cryptographers, distributed network experts, nor do we possess deep computer science knowledge. When we trade, we outsource technical due diligence to others who have those skills.

Others may be top VCs on early investor lists or respected technical advisors for the project. Without these validators, we may still feel satisfied with the technology because the founders have launched successful projects before.

Our job is to determine which project is most likely to succeed in the vertical narrative. Success depends on widely circulated macro and micro stories. You make the most money on a token that shifts from being considered "never" to "possibly" happening.

I would rather invest in a token with a 0.01% expected probability of success and a story in a viral growth phase than in a token with a 50% expected probability of success and a story that has entered the realm of common knowledge. If the probability of success rises from 0.01% to just 1% because the story quickly infects the perceptions of many people, the investment will grow 100 times.

The macro story tells of an observed trend and how this project will capitalize on it. It is more like a story than a trend because we are extrapolating a small movement into a more uncertain future. For example, there is a macro story that "retail derivative trading is shifting from CEX to DEX," while BitPerp is building a Perp DEX. The token of BitPerp will rise because its macro story is currently unknown but has viral potential.

The micro story explains why this particular project will be one of the best in competition within a specific macro story. A micro story case might be "BitPerp received advice from Arthur Hayes, who helped invent Perp trading," and when others hear that Arthur is involved, they will assume the project will receive some exceptional advice to help them beat other competing projects.

I rarely write in-depth micro stories about specific tokens outside of Bitcoin and Ethereum. However, it is bull market time. I have laid the groundwork for driving significant forces in crypto adoption, and it is time to promote my assets.

Results

Do results, such as trading volume growth, TVL, the number of unique addresses, etc., really matter? Yes, they matter, but their importance to token prices depends on which stage of the hype lifecycle you invest in.

When investing in a story/trend that you believe will shift from "never" to "possibly" happening, the attractiveness of the project is less important. The market does not expect much because it believes this token is associated with a trend that is unlikely to grow in the future. Therefore, even mediocre results will be touted as groundbreaking because expectations are so low.

When investing in a story/trend that you believe will shift from "possibly" to "definitely" happening, the attractiveness of the project becomes very important. Market expectations are high because they believe in a bright future. What was considered surprising results in the previous stage is seen as mediocre in this stage. Amazing results are not enough; at this stage, a project must have something truly revolutionary to meet expectations.

Shitcoin Time

The purpose of this article is to show readers the conceptual framework guiding Maelstrom. In the coming months, most of the articles I write will focus on specific tokens we hold and their macro and micro stories. These tokens have been launched or are about to be launched, so I am working to spread this story more widely. I do not care whether you buy or sell any tokens I mention. What I care about is that I have presented such a compelling story and supporting arguments that you will discuss it with others in a positive or negative way.

When I read what I have written on social media, I know I have succeeded.

Here are rough ideas for the macro and micro stories I intend to tell in the coming months.

● Retail shifting to DEX: dYdX, GMX, and possibly other competitors;

● Interest rate swap demand triggered by ETH staking: Pendle;

● Shitcoin dual-token derivatives: Krav;

● DEX chain liquidity provided by middleware, moving towards de-market-making: Elixir;

● On-chain oracle for settlement and clearing prices: Flare;

● Stablecoins backed by illegal fiat reserves: Ethena;

● Bridge-less cross-chain: Axelar.

Takeaways

Right now, people's energy and attention are focused on the astonishing number of spot Bitcoin ETF purchases listed in the U.S. Coupled with the global fiat currency devaluation frenzy, this will drive Bitcoin to unimaginable heights in fiat value. The upcoming ETH ETF will also push ETH prices higher. I already hold BTC and ETH, and I might buy a little more, but overall, my attention is shifting towards Shitcoin.

Can I buy tokens that perform better than BTC and ETH? This is the minimum return rate for Maelstrom. We achieve this by understanding certain projects as much as possible and telling amazing stories.