Why do you always buy at the high points? Detailed explanation of the encryption market narrative scoring formula.

Author: ignasdefi Translator: Shan Ouba, Golden Finance

I bet you’ve spent countless hours trying to figure out the next hot narrative in crypto. If you get it right, you can make a lot of money; but if you enter the market too late, you’ll just be the one left holding the bag.

The best investment returns come from:

• Identify the narrative early
• Plan the path of capital rotation ahead of others.
• Exit when market expectations are at their peak.
• Secure your profits by cashing out.

Then ask yourself: Is another wave of narrative about to arrive? Narratives go in cycles, but speculative capital returns in waves, with the premise being:

• There is real technological innovation supporting this narrative, and even after the first wave of speculation has passed, it can make a comeback.

• A new catalytic event has occurred;

• After the excitement fades, there is still a dedicated community continuing to build.

Ordinals on Bitcoin is an example. You can clearly see four waves of speculative frenzy in the image below.

• December 2022: The Ordinals theory was first published, with almost no activity on-chain.
• March 2023: The BRC-20 standard triggered the first wave, which gradually cooled down over the next six months.
• End of 2023 / Beginning of 2024: Continued development to ignite the second and third waves.
• April 2024: Runes goes live, quickly surges, but the hype fades within a few weeks.

Ordinals provided several months of layout time and multiple exit opportunities. Runes only offered a brief exit window. It has been quiet for more than a year now. Will Ordinals (including Runes), NFTs, or some new format come back?

Maybe. It depends on their narrative scores.

Formula

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This is a formula used to identify emerging popular narratives and determine whether they may trigger subsequent waves of speculation (and such waves are often more sustainable).

It is still being improved, here is my current V1 version formula:

Narrative Score = [(1.5 × Innovation × Simplicity) + (1.5 × Community × Simplicity) + ( Liquidity × Token Economics) + Incentives] × Market Environment

It may not be mathematically elegant, but it clearly illustrates which levers are important and their respective weights.

Let’s analyze item by item:

Innovation

This is the technical aspect and native cryptocurrency innovation that I am关注.

The strongest catalyst is the kind of innovation that goes “from zero to one.” This could occur in a new field (such as DeFi, NFT, RWA), a new token economic model (such as veToken), or even a new token issuance method (such as fair launch, Pump.fun).

I have previously written: “Innovation from zero to one” is unique enough to change the trajectory of the industry. Its originality can ignite a new subfield in cryptocurrency. However, recognizing this kind of innovation is difficult because we always view new things with bias.

When something new first appears, it may not attract any attention at all (like Ordinals) and may even be considered noise. This is why keeping an open mind and daring to try every new trend (especially those that are highly controversial) is key to getting ahead.

Without genuine technological innovation, a narrative is merely a fleeting speculative bubble. This cycle has a particular feature: the introduction of external innovation — AI.

Thanks to AI, we have seen innovations like Kaito InfoFi and AI agents.

Some examples of this cycle:

• Ordinals
• Re-staking
• AI agents
• InfoFi
• SocialFi
• ERC404

The goal is not to list all examples but to establish a mental model that helps you identify these innovations. You can use a rating from 0 to 10 to measure the degree of innovation.

Simplicity & Meme Propagation Potential

Not all innovations are easy to understand. Complex narratives (such as ZK proofs, re-staking) spread slowly; whereas simple or meme-like narratives (like the dogecoin $WIF wearing a hat) spread very quickly.

Can you explain this concept in 5 seconds? Does it have meme potential?

For example:

• High Simplicity (10/10): AI, memecoin, XRP as blockchain banks
• Medium (5/10): SocialFi, DeFi, NFT, Ordinals
• Low (3/10): ZK Proof, Modular Blockchain, Re-staking

Complex narratives take time to ferment, and the pump is slower as well. Simplicity can also strengthen the cohesion of the community.

Community

Bitcoin is the purest “zero to one” innovation. But without a community, it is just a piece of code. The value of BTC comes from the stories we build around it.

Many people do not understand why projects like Cardano or XRP can perform well despite a lack of innovation. The reason is: a loyal community.

Another more extreme example: memecoin.

They have hardly any technological innovation, but memecoins have become a $66 billion market. This is all thanks to a group of people who decided to unite around a certain token.

The question is, how do we measure the size and strength of a community? Is it by looking at the number of followers on X (formerly Twitter)? The engagement on X? Or the number of fans and posts on Reddit?

Some communities are hard to identify because they use different languages or are active in different forums, such as Koreans who prefer to discuss XRP on local forums.

“Mind share” is a great metric (promoted by Kaito), but Loudio’s experiments also show that having a large mind share does not necessarily mean having a real community.

To identify a genuine community (especially in the early stages), you need to get involved in person. Buy a little token or NFT, join Discord or Telegram groups, and see who is discussing things on X (not the kind that posts for money). If you feel a real sense of belonging and connection, that is a strong bullish signal.

In my opinion, Hyperliquid is the fastest-growing community.

The attacks on HYPE by Binance and OKX have only made us more united, giving the supporting team and the protocol a sense of mission and purpose. Hyperliquid is no longer just a project; it has become a movement.

I believe that innovation and community are the two most critical elements**, which is why I assign them** 1.5 times the weight.

Just like innovation, I have also added the variable of ‘simplicity’ to the factor of “community”. Because: the simpler the narrative, the easier it is to spread.

For example, Memecoins (like PEPE) are very easy to understand; even relatively complex projects like Hyperliquid have successfully sparked enthusiasm in the community.

Runes and Ordinals have brought technological innovations, achieving the ability to issue fungible tokens on Bitcoin, which was once thought to be impossible, and they also have strong community support. So, why has the price still fallen?

This is because a third key factor also needs to be considered:

Liquidity

Innovation ignites inspiration, community builds narrative and belief, while liquidity is the driving force that helps you “ride the waves and safely get off at the peak”.

This is the difference between whether you can “successfully catch a wave of sustainability” and “being the last person standing to take over.”

The founder of Runes, Casey Rodarmor, has built a highly creative fungible token model. However, he may also consider building an AMM liquidity pool for Runes on Bitcoin, similar to Uniswap, to sustain market enthusiasm.

Currently, memecoins on Runes struggle to compete with memecoins on Solana or L2 chains due to a lack of passive liquidity pool support. In fact, the trading on Runes resembles that of NFTs on Magic Eden—while buyer liquidity is decent, there is a lack of sufficient seller liquidity, making it difficult to execute large exits. The trading volume is too low, and primary CEXs have no incentive to list.

NFTs also face similar liquidity issues. Therefore, I had high hopes for the ERC404 model (used for NFT fractional trading) — it could have potentially brought passive selling liquidity and trading fee APY returns.

But unfortunately, it failed.

I believe this is also one of the core reasons why DeFi options have failed to rise in the past few years.

Recently, during uncertain market conditions, I hoped to use options to hedge my portfolio, but the liquidity of on-chain options is very poor. I had high hopes for Derive, but its prospects are unclear now.

But I want to emphasize that liquidity is not just about having a large order book, continuous inflow of new funds, listings on CEX, or a high TVL in the liquidity pool (although all of these are important).

The “liquidity” in the formula refers to: those protocols that can achieve exponential expansion after liquidity growth or have a native liquidity growth mechanism.

Some examples include:

• Hyperliquid: The higher the liquidity → The better the trading experience → Attract more users → In turn, drive further liquidity increase.
• ve(3,3) model DEX, such as Velodrome: The bribery mechanism drives liquidity growth.
• Olympus OHM: The protocol has liquidity (POL).
• Virtuals DEX: New AI agent project directly linked to the native token VIRTUAL.

Token Economics

The token economic model and liquidity are equally important. A poor token economy will only lead to a crash. Even with ample liquidity, the continuous selling pressure from unlocked releases is also highly risky.

• Advantages: High liquidity, no large venture capital/team allocation, clear unlocking schedule, burning (hype, well-designed fair launch), etc.
• Disadvantages: Hyperinflation, huge cliff unlocks, no income (L2).

Even a narrative with 10 points of innovation is a ticking time bomb if the token economics only score 2 points.

Incentive Mechanism

Incentive mechanisms can create a protocol, but they can also destroy a narrative.

The concept of re-staking relies on the performance of Eigenlayer. However, due to the failure of the token issuance (possibly due to its complex narrative or insufficient community), this narrative was once marginalized.

Assessing liquidity can be challenging in the early stages of a narrative, but an innovative incentive mechanism can help liquidity to gradually establish itself. What I am particularly focused on is the “new token issuance model.”

If you have read my previous posts, you would know that the market often changes due to new token issuance methods.

In history, we have seen:

• BTC Forks → Bitcoin Cash, Bitcoin Gold
• ETH Fork → ETC
• ICO (Initial Coin Offering)
• Liquidity mining, Fair Launch, low circulation / high valuation (suitable for airdrops, unfavorable for secondary market)
• Points meta (Points mechanism)
• Pump.fun
• Private and Public Dual Round Sales on Echo / Legion

The market structure is changing, and the methods of issuance and incentive mechanisms are also changing accordingly. Once a certain incentive model is abused and its operating rules are well-known to the public, that is a signal of narrative saturation and the peak of speculation.

The recent trend is: Crypto Treasuries. Some listed companies have started purchasing BTC, ETH, and SOL, and these actions have caused their stock prices to outperform the actual value of the crypto assets they hold.

What are the incentives behind this phenomenon? Understanding this is very important, otherwise you could easily become someone else’s bag holder.

Market Environment

Even the best narratives, if born in a bear market trough or during periods of macro risk aversion (such as the early Sino-US tariff war), will be drowned out by the market. In contrast, even ordinary narratives can soar in a loose bull market.

This is the impact of macro & regulatory tides.

You can use the following multiplier to evaluate:

• 0.1 = Cruel Bear Market
• 0.5 = Consolidation
• 1.0 = Healthy Bull Market
• 2.0+ = Crazy Bull, Bubble Period

Example: Runes (April 2024) have innovation, community, early liquidity, and some incentives.

However, its launch coincided with the retreat of the BTC halving hype and a significant market correction (Market_Conditions ≈ 0.3).

Result: Performance was mediocre. If it had been launched three months earlier, the outcome might have been very different.

How to use this formula

Rate each factor on a scale of 1 to 10:

1. Innovation: Is it from zero to one? (Ordinal: 9, Meme Coin: 1-3)
2. Community: True Believers or Mercenaries? (Hyperliquid: 8, VC-chain: 3)
3. Liquidity: Deep market? (Fast Level 1 CEX listing: 9, runes traded like NFTs: 2)
4. Incentives: Generous and sticky? (Hyperliquid Airdrop: 8, No Incentives: 1)
5. Simple: Can it become a meme? ($WIF: 10, zkEVM: 3)
6. Token Economics: Sustainable Development or Ponzi Scheme? (BTC: 10, 90% Pre-mined: 2)
7. Market Conditions: Bull Market (2.0), Bear Market (0.1), Neutral (0.5-1)

Rating is very subjective! I give Runes an innovation score of 9, but you might only give it a 5. This formula is just a suggestion of what factors should be included.

In any case, if we calculate the variables of the runes, it will be:

Innovation = 9 Community = 7 Liquidity = 3 Incentives = 3 Simplicity = 5 Tokenomics = 5 Current Market Conditions = 0.5

Substitute the number (thanks to chatGPT o3):

• 1.5 × Innovation × Simplicity = 1.5 × 9 × 5 = 67.5
• 1.5 × Community × Simplicity = 1.5 × 7 × 5 = 52.5
• Liquidity × Token Economics = 3 × 5 = 15
• Incentive = 3

Subtotal = 67.5 + 52.5 + 15 + 3 = 138

Application Market Conditions (0.5):

Rune Narrative Score = 138 × 0.5 = 69

Therefore, under this model, the rune score is 69.

In comparison, Memecoins scored a bit higher, reaching 116 points, because my evaluation score is quite subjective:

• Innovation = 3 (Since Pumpfun adopts an innovative model to launch memecoins, it is not zero)
• Community=9
• Liquidity = 9 (bound to AMM, high trading volume = high LP yield, listed on CEX)
• Incentive = 7
• Simplicity = 10
• Token Economics = 5 (100% circulation at issuance, no investment risk, but there is conspiracy risk/or cut risk, no profit sharing)
• Market Conditions = 0.5

How many points would you give to DeFi in the current macro environment (regulatory improvements, traditional finance starting to adopt stablecoins)?

Summary

• Early Scanning Narrative: Using tools like Kaito, Dexuai, focusing on “Innovation + Catalyst”.
• Score without mercy: Face reality honestly. Is the token economy poor? In a bear market? No incentive mechanism? These are all important. The market environment is always changing, and sometimes a native innovation (like building an AMM for Runes) can revive the entire narrative.
• Exit before incentive decline: Consider exiting when emissions peak or airdrops are implemented.
• Go with the flow: Do not operate against the macro environment. Accumulate cash during a bear market and deploy during a bull market.
• Keep an Open Mind: Try out protocols, buy some popular tokens, join community chats… Learning through practice is better than just imagining.