Investing in Web3: The Power of Narrative

Invest­ing has always been about find­ing oppor­tu­ni­ties and back­ing them with con­vic­tion. While the tra­di­tion­al approach has been to rely on data and fun­da­men­tals, a new wave of investors is emerg­ing, who believe in invest­ing based on nar­ra­tives. This is known as nar­ra­tive invest­ing, and it’s tak­ing the invest­ing world by storm. 

Web3, which encom­pass­es blockchain, decen­tral­ized finance (DeFi), and oth­er relat­ed tech­nolo­gies, is gen­er­at­ing a lot of hype, and with good rea­son. It is a world where new tech­nolo­gies and ideas emerge every day. Hence nar­ra­tive invest­ing has become even more relevant. 

Nar­ra­tive invest­ing involves invest­ing in a com­pa­ny or tech­nol­o­gy based on the sto­ry that sur­rounds it. This strat­e­gy has been gain­ing pop­u­lar­i­ty in recent years, with investors look­ing for oppor­tu­ni­ties to cap­i­tal­ize on emerg­ing trends and ideas.

In Web3, nar­ra­tives can be pow­er­ful dri­vers of invest­ment deci­sions. Investors are drawn to com­pelling nar­ra­tives that promise to change the world, and many Web3 projects offer exact­ly that. But what does nar­ra­tive invest­ing look like in prac­tice, and how can investors ride the hype?

Web3 Investing Across the Cap Structure

One way to invest in Web3 is across the cap struc­ture. The cap struc­ture refers to the dif­fer­ent types of equi­ty and debt secu­ri­ties a com­pa­ny can issue, such as com­mon shares, pre­ferred shares, and bonds. It involves invest­ing in Web3 star­tups at var­i­ous stages of their growth, from ear­ly-stage star­tups to more mature companies.

In Web3, many star­tups are rais­ing funds through ini­tial DEX offer­ings (IDOs) or ini­tial exchange offer­ings (IEOs), which are sim­i­lar to tra­di­tion­al ini­tial pub­lic offer­ings (IPOs). Investors can invest in these offer­ings through tokens, which are dig­i­tal assets that rep­re­sent own­er­ship or a stake in a project. Some tokens, such as util­i­ty tokens, give hold­ers access to a prod­uct or ser­vice, while oth­ers, such as secu­ri­ty tokens, rep­re­sent own­er­ship in a company. 

Let’s use the blockchain-based pay­ment plat­form, Chain.com as an exam­ple. Chain.com was found­ed in 2014 and pro­vides a secure and trans­par­ent plat­form for finan­cial insti­tu­tions to con­duct trans­ac­tions using blockchain tech­nol­o­gy. The com­pa­ny raised over $40 mil­lion in fund­ing from investors, includ­ing strate­gic investors such as Visa, Nas­daq, Khosla Ven­tures, RRE Ven­tures, and Thrive Capital.

In addi­tion to tra­di­tion­al ven­ture cap­i­tal fund­ing, Chain.com has also raised cap­i­tal through an ini­tial coin offer­ing (ICO), which is a type of crowd­fund­ing using cryp­tocur­ren­cy. Chain.com’s ICO raised over $30 mil­lion in fund­ing, allow­ing the com­pa­ny to expand its ser­vices and reach.

In 2018, Chain.com was acquired by Lightyear, a com­pa­ny that was cre­at­ed by the co-founder of the Stel­lar net­work, which is anoth­er blockchain-based pay­ment sys­tem. The com­bined com­pa­ny was renamed Inter­stel­lar, and it con­tin­ues to offer blockchain solu­tions for enterprises.

Investors can also par­tic­i­pate in this mar­ket across the cap struc­ture, from large-cap coins like Bit­coin and Ethereum to small-cap alt­coins with poten­tial­ly high returns. How­ev­er, with a pletho­ra of cryp­tocur­ren­cies avail­able, it is impor­tant to iden­ti­fy nar­ra­tives that under­pin the investments.

Chain.com’s suc­cess is an exam­ple of Web3 invest­ing across the cap struc­ture. The com­pa­ny has received fund­ing from both ear­ly-stage angel investors and more estab­lished investors such as Visa and Nas­daq. By invest­ing in Chain.com at dif­fer­ent stages of its growth, investors were able to diver­si­fy their port­fo­lios and poten­tial­ly real­ize sig­nif­i­cant returns on their investments.

Angel Investing in Web3 Startups

Anoth­er way to invest in Web3 is through angel invest­ing. Angel invest­ing involves invest­ing in ear­ly-stage star­tups, often before they have a prod­uct or rev­enue. With the explo­sive growth of Web3, there is an end­less stream of new star­tups that are seek­ing fund­ing. This has cre­at­ed a unique oppor­tu­ni­ty for angel investors to get in on the ground floor of the next big thing.

Angel investors in Web3 typ­i­cal­ly invest in star­tups that are focused on decen­tral­ized finance, NFTs, or oth­er Web3 tech­nolo­gies. These star­tups are often led by expe­ri­enced entre­pre­neurs who have a deep under­stand­ing of the tech­nol­o­gy and the poten­tial for disruption. 

Ear­ly-stage star­tups that align with spe­cif­ic nar­ra­tives, such as decen­tral­ized finance or Web3 infra­struc­ture, are par­tic­u­lar­ly attrac­tive to angel investors seek­ing to invest in the next big thing. 

One real-life exam­ple of angel Web3 invest­ing is the pop­u­lar cryp­tocur­ren­cy exchange, Coin­base. The com­pa­ny was found­ed in 2012 by Bri­an Arm­strong and Fred Ehrsam and has since grown to become one of the largest cryp­tocur­ren­cy exchanges in the world, with over 43 mil­lion users as of 2023. Nine mil­lion of these users were active more than once a month on Coin­base in 2022, a slight increase from the 8.8 mil­lion active in 2021.

Coin­base offers a plat­form for buy­ing, sell­ing, and stor­ing var­i­ous cryp­tocur­ren­cies, includ­ing Bit­coin, Ethereum, and Lite­coin. The com­pa­ny has raised over $500 mil­lion in fund­ing from investors, includ­ing sev­er­al angel investors, such as Gar­ry Tan, Alex­is Ohan­ian, and Paul Buch­heit.

These angel investors rec­og­nized the poten­tial of Coin­base ear­ly on and made strate­gic invest­ments in the com­pa­ny. Their invest­ments helped to fuel Coinbase’s growth and suc­cess, and they were able to real­ize sig­nif­i­cant returns on their invest­ment when the com­pa­ny went pub­lic in April 2021.

Angel Investors must be able to eval­u­ate the team, the prod­uct, and the poten­tial mar­ket size. They must also be able to iden­ti­fy promis­ing nar­ra­tives and dif­fer­en­ti­ate them from hype. While the risks asso­ci­at­ed with ear­ly-stage invest­ing are high, the poten­tial rewards can be enormous.

Coinbase’s suc­cess is a prime exam­ple of the poten­tial for sig­nif­i­cant returns on invest­ment in the Web3 space. The com­pa­ny has dis­rupt­ed the tra­di­tion­al finan­cial indus­try by offer­ing a decen­tral­ized and trans­par­ent plat­form for buy­ing and sell­ing cryp­tocur­ren­cies, and its suc­cess has inspired a new gen­er­a­tion of Web3 startups.

Narratives in Web3 Investing

Nar­ra­tives play a crit­i­cal role in Web3 invest­ing. In this con­text, nar­ra­tives refer to the sto­ries that investors tell them­selves and oth­ers about why a par­tic­u­lar tech­nol­o­gy or com­pa­ny is valu­able. These nar­ra­tives can be pow­er­ful dri­vers of investor behav­iour, as they cre­ate a shared under­stand­ing of what is valu­able and why.

For exam­ple, the nar­ra­tive around decen­tral­ized finance is that it has the poten­tial to dis­rupt tra­di­tion­al finance and make it more acces­si­ble to every­one. This nar­ra­tive has been a dri­ving force behind the explo­sive growth of decen­tralised finance over the past year.

A strong nar­ra­tive can gen­er­ate inter­est in a project and dri­ve demand for the prod­uct or ser­vice. For exam­ple, the nar­ra­tive around non-fun­gi­ble tokens (NFTs), their poten­tial to rev­o­lu­tion­ize the way we think about own­er­ship, and the role that blockchain tech­nol­o­gy can play in cre­at­ing a more trans­par­ent and trust­wor­thy inter­net. This trend has been seen with games such as Axie Infin­i­ty and The Sand­box, where play­ers can buy and sell vir­tu­al land, items, and crea­tures using cryp­tocur­ren­cy. The nar­ra­tive is that these NFTs have real val­ue, and as the games grow in pop­u­lar­i­ty, so too will the val­ue of the NFTs. Thus, the nar­ra­tive became a dri­ving force, with investors and col­lec­tors eager to be part of the story. 

Anoth­er exam­ple is Cryp­toP­unks, which are among the ear­li­est NFTs on the Ethereum blockchain. Each Cryp­toP­unk is a unique, 8‑bit image of a pix­e­lat­ed char­ac­ter, and they have gained sig­nif­i­cant val­ue due to their his­tor­i­cal sig­nif­i­cance in the devel­op­ment of NFTs. Investors believe that Cryp­toP­unks rep­re­sent an impor­tant piece of Ethereum’s his­to­ry, and as such, they have become a valu­able investment.

Anoth­er nar­ra­tive that has been pop­u­lar in Web3 is the promise of “the next big thing”. Investors are often drawn to projects that promise to dis­rupt indus­tries or change the world. Many Web3 projects aim to decen­tral­ize var­i­ous aspects of our lives, from finance to social media. This nar­ra­tive has drawn investors who believe that decen­tral­iza­tion is the future. Hence, projects that align with this nar­ra­tive, such as decen­tral­ized exchanges and blockchain-based social net­works, are often viewed favourably by nar­ra­tive investors.

Anoth­er nar­ra­tive that has been grow­ing slow­ly is that of decen­tral­ized social media. Unlike cen­tral­ized social media plat­forms like Face­book, Twit­ter, Insta­gram where user data are con­trolled and can be sold to adver­tis­ers, decen­tral­ized social media plat­forms offer a bet­ter alter­na­tive —free­dom for users to choose and be in con­trol of their dig­i­tal des­tiny. These plat­forms such as Lens pro­to­col are becom­ing a top choice for cryp­to natives. This need to be in charge of their dig­i­tal des­tiny on social media is why decen­tral­ized social media plat­forms are pop­ping up across the cryptosphere.

The Risks of Narrative Investing

While nar­ra­tive invest­ing can be a pow­er­ful tool, it’s not with­out risks. One of the biggest risks is that nar­ra­tives can be dri­ven by hype and spec­u­la­tion rather than fun­da­men­tals for exam­ple, meme­coins. This can lead to inflat­ed val­u­a­tions and a bub­ble men­tal­i­ty, which can be dan­ger­ous for investors.

Anoth­er risk is that nar­ra­tives can change quick­ly, and investors who are slow to adapt can be left hold­ing the bag. In the fast-paced world of Web3, it’s essen­tial to stay on top of the lat­est devel­op­ments and be ready to piv­ot when necessary.

Conclusion

Nar­ra­tive invest­ing has emerged as a viable invest­ment strat­e­gy in the web3 world. How­ev­er, it is impor­tant to note that nar­ra­tive invest­ing can be a dou­ble-edged sword. 

Nar­ra­tives cre­ate excite­ment and dri­ve invest­ment. But some nar­ra­tives may promise more than they can deliv­er, and thus can also be mis­lead­ing. It can lead to hype and over­val­u­a­tion, with investors chas­ing the lat­est nar­ra­tive with­out ful­ly under­stand­ing the under­ly­ing tech­nol­o­gy or poten­tial risks. In such cas­es,  investors must be able to sep­a­rate hype from reality.

As the ecosys­tem con­tin­ues to evolve, investors should be mind­ful of emerg­ing nar­ra­tives and con­sid­er the under­ly­ing tech­nol­o­gy and poten­tial risks. It is impor­tant to con­duct thor­ough due dili­gence and under­stand the fun­da­men­tals of the invest­ment. Investors who can iden­ti­fy promis­ing nar­ra­tives and eval­u­ate projects based on their poten­tial for suc­cess can ride the hype and see sig­nif­i­cant returns in this excit­ing new space.

Read also: Why do people buy NFTs?