Exploring the root causes of sudden rises and falls, the only scarce resource in the cryptocurrency trading market: attention

Cryptocurrency trader Cobie explains the volatility of crypto assets in his latest article using "attention" as the main factor. He believes that attention is the scarcest resource in the crypto space, and the price movements of tokens are often closely related to the level of attention they receive.

Original article: "Tokens in the attention economy"

Scarcity

Scarcity in cryptocurrencies is often discussed, whether it's through NFTs achieving enforced digital scarcity or statements like "there are only 55 million millionaires globally, but Bitcoin only has 21 million."

In reality, the only truly scarce resource in cryptocurrencies is attention.

The capital seeking venture investments is not scarce. This summer, those entering the crypto space are raising billions of dollars to explore the metaverse and decentralized versions of Uber. A billion dollars is no longer a significant amount in this sector.

Cryptocurrency assets are also not truly scarce. Of course, this statement may seem irrational, as BTC and ETH are designed with fixed total supplies or currency tightening. Yes, there may only ever be 5,200 Crypto Dickbutts, but the number of projects one can speculate on in the crypto space continues to increase, theoretically ad infinitum.

More accurately, the capital seeking venture investments does not need to be entirely allocated to assets held by crypto OGs.

This influx of new funds is highly diversified, which becomes more apparent during bull markets, especially as the market reaches its peak, and the long-term value theory begins to retreat from the minds of fund managers who recently discovered they are geniuses.

Yes, there are only 1,000 CryptoPunks, but there are also 1,000 Bored Apes, Mutant Apes, Keanu Dogs, ArtBlocks, CoolCats, Meebits, Hashmasks, you name it. Of course, Ethereum is implementing EIP1559, burning billions of dollars worth of ETH, increasing its scarcity over time. However, if one feels they are late to the game with ETH, there are still choices like AVAX, SOL, LUNA, ONE, NEAR, and even ADA.

Over time, truly valuable crypto assets have proven to be very scarce. Only a few cryptocurrencies have outperformed Bitcoin over more than one bull-bear cycle; most have died out. However, it's not unrealistic to imagine similar events happening again in the medium term.

As the frenzy subsides, we will sober up and recover from the madness, feeling the reality and shame, reflecting on the decisions we made during this out-of-body experience. Capital will return to value projects, but for investors who have indulged in the frenzy, "value" may be much smaller than they imagined.

Currently, a $1 billion fund that transitioned from a former Citibank "startup division manager" to "wagmi-punk-2383" has been pampered with diversified targets and expanding investment opportunities. New funds are pouring in daily, and 100 founders are building cross-chain DeFi metaverse games.

The only truly scarce resource is attention.

Attention

Attention is the currency of the modern internet. Web2 companies discovered this early on, as users trade attention for services, and companies capture that attention to sell something at a specific time, usually acting as an intermediary between user attention and businesses.

As a currency in the token economy, attention is even more pronounced and direct. Over 50 IDOs occur daily, with all projects vying for your dollars and community engagement. Airdrops have been non-stop over the past year, providing rewards to users and supporters.

Traditional companies pay you $5-10 to use their products, offering $10 off on your first Uber ride upon registration. In the Web3 space, attention battles involve ecology rewards in the nine-digit range, and five-digit airdrops are common. Crypto YouTubers charge five to six figures for advertisements, indicating high demand for attention.

Asset Valuation Based on Attention

In a previous article, I mentioned that the crypto bull market is more like playing a game than investing. If cryptocurrencies are a large-scale multiplayer online game scored in dollars, then attention dictates many short-term metagames.

Most crypto players cannot evaluate the technical advantages of projects themselves; instead, retail investors heavily rely on pump calls and community consensus for decision-making.

If we simplify token prices into a formula of "supply/sellers" and "demand/buyers" changing over time, you can explore how attention scarcity affects price.

Obviously, if demand increases or sellers decrease, the price will rise. However, the potential factors affecting supply and demand do not change rapidly in the crypto player's bull market game.

Specifically, the value created by protocol developers often occurs over a multi-year timeline, while crypto bull market players only engage for weeks, and often even shorter periods.

"Attention" is the only factor affecting supply and demand changes, aligning with the rhythm of players since it is commanded and controlled by players.

Assets of Interest

During the frenzy of a bull market, top players do not buy the "best" assets; instead, they try to buy assets that are about to receive a lot of attention or realize their valuation potential.

Top traders know they want to buy "winners" for maximum returns. They want to buy projects that transition from "niche" to "winners." They are even more willing to buy projects that have the potential to transition from "finished" to "retail trap."

While they know the risk is greater with "finished" projects because the likelihood of them becoming popular is lower, these projects can transform from "finished" to "niche" through key pivots, technical updates, and leadership changes.

Traders know that any project in the chart that can move up or to the left presents a profit opportunity.

Winners

"Winners" are the best assets for long-term investors and retail investors because these projects are easily recognizable. However, for heavy crypto players, these projects may have a lower chance of relatively higher returns as profits may tend towards the market average.

Excellent traders aim to surpass the market's average returns significantly. Obvious examples of "winners" are Ethereum. However, "winners" also carry downside risks; over time, as the crypto macro landscape changes, "winners" may gradually transition to "niche" or even "finished."

Retail Traps

Compared to market averages, "retail traps" may also lack opportunities and carry higher risks than "winners" due to poor technology, teams, and long-term prospects.

While they could potentially turn into good projects, the likelihood is low and would take a long time. The best-case scenario is that the project continues to approach the average level of the market, while the worst-case scenario is transitioning from "retail trap" to "finished" as the market realizes it's a bad project and loses popularity.

Attention Changes

As projects gain popularity and community awareness rises, they gradually attract traders, and this period of "becoming favored" is when asset valuation changes the most.

Once a project becomes favored, the number of market participants holding that asset gradually saturates. Once saturated, it needs to

1. continuously appreciate due to an overall crypto market uptrend, or
2. the project's fundamentals must continue to improve relative to the market.

This is why during the frenzy of a bull market, hardcore crypto players are not interested in holding "winners" or "retail traps." Options 1 and 2 are too slow for these addicted gamers. With significant opportunities in the crypto market and equally significant opportunity costs of holding both, these gamers are always on the lookout for undervalued assets.

They aim to sell when the valuation approaches and hold "winners" when looking for better trades. Long-term investors are less concerned with playing the crypto game; they are content buying "winners," betting that "winners" will appreciate with the overall market or evolve into increasingly superior projects over time.

$SOS / Loot / BAYC

There are many examples of sudden market attention.

The recent $SOS airdrop is worth discussing. SOS was airdropped by a third party based on previous NFT transaction records on OpenSea. This is interesting because quickly boosting the attention of all serious crypto players to a project by airdropping a certain amount of funds is an excellent way to increase the attention on the project.

It's important to note that at this point, SOS has no product or fundamentals; it's purely a speculative market born out of the desire of competitors or the public for an OpenSea coin.

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

1. Sell to exchange for dollars or ETH.
2. Hold SOS to see what happens.
3. Buy more SOS from somewhere.

As attention focuses on this new market, crypto players ask themselves, "How can I make money from this?" This is, of course, the ultimate meaning of the game. If enough people decide to take strategies 2 and 3, resulting in more funds in 3 than 1, the price of SOS will rise, making its chart look pretty good.

If the chart looks good, more people will discuss SOS, showing their choices to more people and another group of newcomers. Now, market participants who have never used OpenSea and didn't receive the airdrop must choose:

1. Buy into SOS to participate.
2. Wait or completely ignore the SOS market.

Some will choose option 1, further driving the price up. As the price continues to rise, people are happy to make money, leading to continuous discussion about this trendy new project.

"Ownership" captures everyone's attention, and soon SOS transitions from "niche/finished" to "winners/retail traps" level.

As the price rises, more people are willing to sell their airdrops. As the trend stagnates and attention decreases, new entrants deciding to buy into SOS dwindle. Eventually, SOS no longer shines, becoming just a token without a product, low discussion, and a decreased viral spread K Factor, with attention only from existing holders.

Once a project garners the attention of "many" players, making "all" players reconsider whether to enter becomes very easy. However, sustaining attention without a product or users is much more challenging.

You could say the experience of Loot is similar to the above, which might also explain why the best-performing NFT PFP series this year, Bored Ape Yacht Club (BAYC), has managed to flip CryptoPunks' floor price while almost all competitors launched at the same time have vanished. BAYC creates value for the community by focusing on building a community, with a cohesive community becoming permanent promoters of BAYC, continuously innovating and garnering more attention.

Dogecoin

Dogecoin is another interesting example of gaining attention this year.

Historically, Dogecoin has risen relative to BTC very regularly. From 2014 to the end of 2020, the DOGE/BTC price fluctuated continuously over seven years, almost maintaining the same range.

When people became aware of Dogecoin, they had two options:

1. Buy Dogecoin.
2. Ignore it.

Over the seven years, the proportion of people choosing options 1 or 2 has remained essentially unchanged. Let's assume that out of 100 people, 90 choose to ignore it, while 10 buy Dogecoin.

Then, in 2021, a brand new attention catalyst injected into the market: Elon Musk became the cheerleader for Dogecoin. This changed two things:

• More crypto users were convinced to buy Dogecoin.
• Crypto newcomers were convinced to make their first crypto purchase, starting with Dogecoin.

So when Musk began shilling Dogecoin, it was an intriguing moment in the crypto market. You can ask yourself, "If Musk continues to attract attention, how many audiences can he reach at most? How will the proportion of options 1 and 2 change?"

Thinking in this way makes betting on Dogecoin trading relatively easy. If Musk continues to hype it, the attention he attracts will significantly alter the supply-demand relationship for a period, benefiting Dogecoin holders. Perhaps you could estimate a 5 to 10 times increase. If he stops, it might result in a -33% loss, a very favorable risk/reward ratio.

However, it feels like everyone potentially interested in buying Dogecoin is aware of what has happened, namely the damn SNL skit on Saturday night. At this point, attention can be considered saturated, as those who know about Dogecoin are saturated, those convinced to buy have bought, and the current attention is focused on confused market observers and those who have bought in as much as they can.

As the attention ratio changes, leading to a significant decrease in new entrants, the final attention is only from Dogecoin holders. As ownership and project valuation become excessively high, causing public attention, savvy traders begin to sell.

ADA

Cardano is another interesting case. Despite having the same core argument behind the project, its performance in 2021 differs significantly from Avalanche, Solana, and Luna.

With the start of the bull market, Cardano gained widespread attention. It became the favorite token of crypto YouTubers, with all the famous faces listing it among their top 3 projects. Of course, Cardano's founder is also a crypto YouTuber, with his streams often reaching 50,000 viewers.

However, since 2021, ADA has fallen 93% against SOL ADA/SOL.

Perhaps we can also explain this using the descriptions of SOS and BAYC.

When a project gains a significant amount of attention, the price typically rises and is revalued. From the end of 2020 to early 2021, Cardano was a top project in retail attention as the "Ethereum killer," and many newcomers joined the market, further increasing attention.

However, over the year, other L1 blockchains like Avalanche and Solana have created vibrant and engaging ecosystems, similar to BAYC's approach. They continuously gain more market share and attention from users, developers, and speculators, rapidly launching new projects and opportunities on these L1 chains.

These communities become perpetual promoters, and as top crypto players are constantly on the move, DeFi, games, and any projects on these L1 chains become part of a continuous positive cycle of attention.

Due to attention scarcity, as all L1 chains vie for market share, Solana and Avalanche have won user attention, meaning losses for other L1 chains.

Cardano is very popular, but because users can't do much on-chain right now and there isn't an ecosystem that allows crypto players to stay and keep winning game points on Cardano, it feels more like it's transitioning into a "retail trap" rather than a "winner."

Conclusion

Attention is the only scarce resource in cryptocurrencies.

When evaluating cryptocurrency assets or playing a large-scale multiplayer crypto trading game, changes in attention ratios and saturation of holders are effective indicators for observation or valuation.

The best traders are always looking for relatively lesser-known assets. If these projects can bridge the gap from "no recognition" to "high popularity," their valuation will have significant growth potential. When ownership attracts public attention, they immediately sell.

Strategies of holding "winners" and surviving the frenzy of a bull market only apply to those with stable minds leading balanced lives. Perhaps one day I will be one of them.

Oh, do not listen to the majority of crypto YouTubers; they're converting your attention into their ad revenue.