What is Fear Of Missing Out (FOMO)?
When cryptocurrency traders and investors anticipate a digital asset's value to rise, and they have not yet purchased any, they can experience an overpowering sense of stress known as "Fear Of Missing Out" or FOMO.
The concept of FOMO was first described in 2000. It was not until a few years later that the acronym FOMO was coined to describe people's focus on the positive aspects of their lives on social media, leaving readers feeling sad or inadequate about their own experiences.
In the financial markets, FOMO is the feeling an investor or trader has when they think they are missing out on a profitable opportunity. This experience is prevalent when an item appreciates dramatically over a relatively short period of time.
FOMO can cause individuals to make choices based more on emotion and fear of losing out than on reason and logic. This can result in trades being made for overvalued assets and significantly higher risks of financial loss, making it particularly risky for untrained retail investors.
"FOMOing" into a crypto trade based only on emotion, without considering other factors, is likely to result in the investor losing money.
What Makes FOMO a Challenge in Cryptocurrency Trading?
FOMO is a significant factor in crypto trading due to the potential for huge profits in the young and unstable market. The success stories of early Bitcoin and Ethereum investors have led to a desire for quick gains and the allure of new coins, resulting in inexperienced individuals falling victim to scams.
The value of coins is often dependent on market sentiment, leading to a perceived opportunity for lucrative returns. FOMO has been driving traders to invest in cryptocurrency, akin to modern-day gold rush seekers armed with their wallets.
FOMO, while a source of volatility, signals mass adoption and growing popularity in cryptocurrency markets. However, FOMO can also breed distrust and increase the likelihood of falling prey to exit scams. It is crucial to pay attention to other market signals and not rely solely on FOMO when making trades.
Causes of FOMO
Identifying the causes of FOMO in the crypto community is crucial for traders and investors to overcome this emotion. Although not exhaustive, the causes listed below provide a foundation for preempting FOMO.
- The desire to catch the next big move, driven by the success of early investors in cryptocurrencies like Bitcoin and Ethereum, is a dominant force in the community.
- While profit-oriented FOMO is common, fear of significant losses can also drive it.
- Information overload from multiple sources can also fuel FOMO.
- Finally, the mentality that the early entrant always wins is prevalent due to the success stories of early investors in booming cryptocurrencies.
Indicators of FOMO to Monitor
It is crucial to not only understand the causes of FOMO, but also to recognize its signs, particularly in oneself. Here are some behaviors that may indicate that an investor is driven by FOMO:
- Obsessively following social media trends and cryptocurrency trades.
- Constantly thinking about potential gains if a trade is executed.
- Feeling the need to purchase a cryptocurrency as soon as you hear it has gained a significant percentage.
- A desire to trade or invest solely because a crypto asset has recently become popular.
These actions demonstrate how greed can lead to risky and irrational decisions that may be short-lived.
How to Avoid FOMO
Markets are often driven by fear and greed in the short term, but succumbing to these emotions can result in disastrous investing decisions. To avoid FOMO when the next bull market arrives, there are four exercises you can practice:
- Understand that investing is a long-term commitment, and take the time to educate yourself about the investment before making a decision.
- Focus on your goals and plan for the future before making an investment decision. Consider the purpose of the investment and whether the outcome aligns with your objectives.
- Build a portfolio of quality investments based on a long-term thesis, rather than chasing hot tips from social media.
- Be wary of the source of investment ideas and understand that everyone has an agenda. Spend time away from social media and virtual interactions to arrive at an objective decision, rather than an emotional one. Ultimately, make investment decisions that align with your financial situation and goals.
Examples of FOMO in Crypto
Dogecoin's volatile movements in 2021 is a familiar example of crypto FOMO. Elon Musk's tweets about Dogecoin caused FOMO among those who did not own it at the time. The meme cryptocurrency experienced a surge or plummet in price depending on how Musk's words were perceived by the market. In May 2021, Dogecoin jumped ahead of Musk's appearance on "Saturday Night Live" and then slid nearly 30% in the 24 hours after he referred to it as a "hustle" on the show.
FOMO in the crypto community has fueled investment into many shitcoins. It is fostered mainly by the desire to seize the next moneymaking successor to Bitcoin. However, making a potentially profitable move in the market requires making rational decisions after conducting in-depth research before investing in any token.
The Bottom Line
FOMO has been a human experience predating the existence of cryptocurrency, but with crypto, the stakes are higher since investors risk losing their entire investment. However, adhering to guidance with discipline can assist investors in avoiding the risks and impact of crypto FOMO.
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