When we speak about the Fear of Missing Out (FOMO) phenomenon in relation to cryptocurrency trade, many assume it to be some mystical force on the internet which is conjured out of thin air to propel new crypto coins.
However, reality is way more complex than that!
When we look at the performance of popular crypto assets and analyze the role of FOMO in it, there are several deciding factors that come up prominently. Whether or not, a cryptocurrency generates FOMO and ultimately shoots up its value depends on these factors aligning perfectly leading to the phenomenon.
In this article, we will illustrate this intricate string of events that leads to FOMO and how investors can learn a lot from the phenomenon.
What is FOMO?
FOMO in the crypto ecosystem refers to an overall sense of anxiety and fear in investors of having missed out on early profits on a crypto asset by not timely investing in it. As the acronym suggests, FOMO thrives on the perceived sense of having missed out on early gains and a collective environment of this sentiment often leads to shooting up of prices of crypto assets.
Key Factors Behind FOMO in Crypto Trading
1. New Coins in the Market
In the world of cryptocurrency, there’s always something new on the horizon. This is why even someone who’s disillusioned with the market usually has something to return back to.
New cryptocurrencies are popping up every year, and they all look very exciting. The trick of the trade in the crypto ecosystem is always early investing so with new currencies, it is lucrative to buy them sooner- preferably in the presale or initial coin offerings (ICO) stages. This strategy allows early investors to cash in on their assets when its prices shoot up.
However, it is also important for investors to do their research diligently before investing in any new coins. Today, there is a plethora of information related to crypto and their predictions on the internet and readers can always go for reliable, trustworthy sources before they decide to hop on the early birds’ train.
2. Role of Social Media
On social media, news spread like wildfire. Algorithms of social media platforms allow users to be acquainted real time with crypto news and hence be aware of any hype generated around a new coin.
Social Media also known to amplify extreme views so users propelling intense predictions like, “hey, this next crypto will be worth X1000 by next year this time and you’re insane if you don’t buy” gets in your news feed immediately.
At first, a cautious, observing investor might be apprehensive of such extreme predictions but once their news feed is brimming with similar predictions about the same coin, FOMO kicks in, and they ask themselves: “Is there really any downside to putting a bit of money in this coin, just in case?” When enough people do this, you have a phenomenon.
3. Strong Q1
Recency bias is one of the strongest psychological phenomena in existence. People quickly forget what came before. This is why they’re so quick to hop on the bandwagon. When things go right, they forget any rough patch that happened before but when things start heading south, it will seem like things were never that good to begin with..
According to Robinhood’s Q1 crypto trading report, there’s a massive increase in the amount of money circulating on this exchange. It’s safe to assume that the majority of large exchanges are seeing the same positive increase, which means that the Q1 of 2024 was pretty strong. In the minds of investors, there’s no reason why the second quarter of the year would be any different.
Whether or not this will be the case still hangs in the air but a good first quarter is enough to sway the market sentiment. With that in mind, investors will enter Q2 much more confident, which means that they’ll be willing to spend more.
4. Media Hype
It’s no longer just social media and crypto communities fanning the flames. The news-hungry mainstream media is joining the game. After all, massive portals belonging to renowned newspapers are just as desperate for clicks and shares as small independent blogs. This makes them pursue anything newsworthy, and in the last several years, cryptocurrencies seem to be the topic that’s too lucrative to skip.
Reports by legacy media platforms add that much needed credibility to a crypto hype, especially, when you are an investor older than the GenZ bracket.
5. Peer Pressure
When things start going great, everyone’s buying. This increases FOMO because it brings you to your own social circle. Now, it’s no longer about people on the internet making a killing while you’re waiting on the sidelines. Now, it’s your gym buddies, your Uber driver, and your plumber who are making money hand-over-foot while you’re still weighing your options.
You don’t want to be the only one left behind, right?
Remember that even a large number of people can (and many times have) been wrong in the past. The problem is that people believe in the concept of safety in numbers, which is a huge fallacy. The thing is that if a lot of people start investing, the market share of individuals is smaller, which should make the market less volatile. If the entire market is controlled by three actors, a single decision (and humans can be very irrational) will shake it to the very foundation.
6. Innovative technology
The main reason why crypto is making a huge breakthrough now (as opposed to some years in the past) is because there’s more crypto technology than ever. Now, the majority of these coins have some underlying utility.
AI coins, for instance, are tokens that gatekeep certain AI platforms and features on these platforms. The higher the value of these platforms (which is only tied to the use of technology and its capacity), the more powerful it will be. This adds more fuel for the FOMO.
Countering FOMO in Investment Decisions
Fear of missing out (FOMO) can be a powerful force in investing, but it’s crucial to understand it’s just one piece of the puzzle. While FOMO can lead to impulsive decisions, it can also point towards potentially lucrative opportunities. The key is to separate the hype from reality.
Let’s take Bitcoin (BTC) in January 2017 as an example. Investors experiencing FOMO might have jumped in without proper research. However, for those who had already done their due diligence, the surge in price could have been a confirmation of their investment thesis.
The bottom line: Don’t let FOMO dictate your investment strategy. Use it as a prompt for further research, but always make informed decisions based on a careful analysis, not fleeting emotions.
