Price or Narrative, which comes first?
The chicken. Or the egg?
Web 3 games involve NFTs and tokens, which by extension mean that they involve things worth real money.
For developers, gaining an in-depth understanding of how prices are impacted by in-game economy design is valuable.
However, what is talked about less is how ‘narrative’, aka hot topics in news & social media, can also impact pricing. These potential price impacts have implications on the game economy and thus player experience, meaning it’s very important to understand how to identify, quantify and even predict this impact.
With this in mind, I’ve been been thinking recently about the relationship between price and narrative (further defined below), and wanted to share a short piece.
Price vs narrative: introduction
Within web 3 there are two distinct topics that get discussed a lot. Price and narrative.
Price in this instance refers to the cost of an NFT or a token.
Narrative refers to what people talk about as being the underlying thesis or industry trend which can affect the NFT and token. Often it’s the hot topic on Twitter
What’s interesting about this however is that there seem to be roughly two schools of thought that are in direct opposition to each other:
Price drives narrative - The view that narrative only forms after there is a change in price, and that the narrative works backwars to ‘explain’ the changes in price. One example might be if that the price of ETH goes down, and so the narrative forms around this to justify it (e.g. due to the fed, or market correction, etc)
Narrative drives price - The view that attention and popularity is what has the biggest impact on demand for NFTs & tokens, and therefore the narrative of what is talked about is what impacts prices.
Which one is true? I’d argue it’s a bit of both, but that we can be more advanced in predicting which is which.
Approach to resolving: Using Demand / Supply
There are a few approaches to answer this question.
One approach involves looking at historical data of major price movements across the NFT & token industry and seeing whether it occured before or after narrative influences (i.e. proxied via say Twitter mentions). Unfortunately I don’t have this, so if anyone has done this analysis before I’d love to see it!
An alternative theoretical approach would be to break price down into supply and demand.
Price of a NFT / Token = Supply / Demand
More sellers = more supply = lower price
More buyers = more demand = higher price
Instead of looking at how narrative impacts price, instead assess how it impacts supply and demand & vice versa. Under this approach I think there are two main scenarios:
Narrative impacts demand / supply: Narrative forms in the market which influences the decisions of both institutional and retail token holders. Examples might be: Big announcements & influencer excitement about an upcoming project, constant mainstream news about a certain topic like P2E games, or a major security breach in a DeFi protocol. This results in increased (or decreased) demand for a token. In this scenario, narrative drives price
Something else impacts supply / demand which drives narrative: Underlying fundamental or structural forces result in a change in the demand or supply of a token. Examples might be: a play-and-earn game experiences continued massive player growth which requires NFTs, or there is a major VC unlock for a token which results in sell pressure. This results in a change in price, without necessarily any narrative involvement. In this case, price drives narrative, as we will see a narrative form to explain the price.
The reason I like this approach the most is that it’s somewhat quantifiable. We can kind of predict (roughly) how much certain things including narrative is impacting supply / demand, and use this to see what kind of impact it has on prices.
Conclusion
In summary, I’d argue that both can be true. Narrative can drive prices, and prices can drive narrative.
What we can do is look at supply and demand of NFTs or tokens to figure out which is which.
This is ultimately important for better decision making and prediction, as it helps game developers filter out the ‘noise’ of narrative in impacting their game economy, from the outcome of their economic decisions and design on the price.
This isn’t a holistic approach, but hopefully opens up some discussions if nothing else.
Feel free to share thoughts in the comments!
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