Crypto Markets are filled with FUD(Fear, Uncertainty, and Doubts) and FOMO(Fear Of Missing Out). Full forms of these terms are enough to explain their meaning. But how does FOMO or FUD influence the decision-making of market participants, even the professionals?
As traders may know, Trading and Investing require a stable mindset. A mindset that doesn’t easily get influenced by irrational price movements or volatility in the markets. Knowledge is important for investing or trading. But traders who have the required knowledge on the subject fail miserably in the markets as well. It is because they aren’t good enough at handling their emotions. Be it Trading or Investing, you need to have the patience and control over your emotions to succeed in the markets. FUD and FOMO are the factors that affect the trader’s mindset and lead them into making wrong and impulsive decisions.
What drives FOMO to investors?
Cryptocurrencies are the prime drivers of FOMO more than any other commodity. It is because FOMO is driven by greed, and cryptocurrencies are too volatile. They can provide very lucrative returns to their investors and that too in a very short span of time.
Let’s take a scenario to understand this easily:
An investor sees a crazy rally happening in a commodity but he’s scared to enter at higher levels and is not sure if the valuations justify the rally of the commodity. Here, he is thinking logically. But still, he goes ahead and buys that currency.
This is what most traders do, they just can’t resist the temptation. This is an example of FOMO. The thought process of that investor was right, as he said he couldn’t justify the rally of the coin. But still, he bought it, he gave in to the temptation of what he would be missing if he didn’t buy the coin rather than thinking what he stands to lose if his own thought process turns out to be correct.
FOMO makes investors take unreasonable decisions. In a crypto market when you see a currency’s price double in a week or two, a part of your brain already regrets missing that opportunity. But people have trouble accepting the fact that they missed the rally, so instead, they go ahead and buy it at irrational rates. Later on, just on the retracement, they could lose 20-30% of their investment.
How to protect yourself from FOMO?
What an investor needs to understand is that he/she cannot grab each and every opportunity that comes with the market. Sticking to your strategies is crucial to not get trapped by irrational price movements. That doesn’t mean that the investor should ignore the opportunities that the market presents. It is not easy to resist the temptation to buy, especially for beginners. You might read this article, even understand it, and still get caught in the FOMO trap.
The experience required to not fall for such traps comes with practice. You need to burn your hand to get the kind of patience and control that trading and investing demand. That’s the reason why professionals suggest beginners start with small amounts and not go all in, at the beginning, itself. The losses you make at the start should be considered as the price you pay to “learn and understand” the working of markets
Factors that bring FUD in Investors
Fear, uncertainty, and doubt will always be present in the markets. Especially with cryptocurrencies, and their current scenario where many governments are still unsure about making them legal.
There are a lot of factors that could bring fear, uncertainty, or doubts to the crypto market. Below you may find a few examples of such cases:
1: When China banned Crypto transactions: China is the second-largest economy in the world. Now, when a country like that officially bans all Crypto transactions in their country, it is a cause for concern. For the investors who have invested their savings in Cryptocurrencies with the hope of earning better than average returns, this is a major setback. Fear of crypto crashing down as it did in 2017 is there in the investors’ mindset.
2: Elon Musk and his views on Cryptocurrency: Every Crypto trader is familiar with the name of this Billionaire. For his active interest in the crypto world. Crypto traders keep a close eye on his actions and his tweets regarding cryptocurrency. Therefore, when on March 24, when Elon Musk approved to take Bitcoin as a payment for Tesla Cars. All the Cryptocurrencies shot up like crazy. But within two months, he took it back by saying, crypto harms the environment, because of which he could not accept it as payment for Tesla cars. Crypto tumbled like crazy, just the way it had jumped up.
In another two months, he went on to say that he might start accepting Bitcoin as a payment for Tesla, on a condition that 50% of the energy used in mining the coin should come from renewable resources. This was an example of an uncertain scenario. Here, crypto investors have to make a call that would decide their fortunes.
FUD and FOMO are both part of the crypto markets. It’s like a package deal, you cannot have one without the other. An investor needs to learn to control his emotions so as to not get influenced by such things.