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6 Factors Driving FOMO in Crypto Trading
When we talk about the Fear of Missing Out (FOMO) phenomenon in relation to cryptocurrency trading, many assume it is some mystical force on the Internet that is conjured out of thin air to drive new cryptocurrencies.
However, the reality is much more complex than that!
When we look at the performance of popular crypto assets and analyze the role of FOMO in it, several deciding factors emerge prominently. Whether or not a cryptocurrency generates FOMO and ultimately increases its value depends on the perfect alignment of these factors leading to the phenomenon.
In this article, we will illustrate this intricate series 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 a general feeling of anxiety and fear in investors that they have missed out on initial profits from a crypto asset by not investing in it in a timely manner. As the acronym suggests, FOMO thrives on the feeling of having missed out on early gains and a collective environment of this feeling often leads to rising prices of crypto assets.
Key Factors Behind FOMO in Crypto Trading
1. New coins on the market
In the world of cryptocurrencies, there is always something new on the horizon. This is why even someone who is disillusioned with the market usually has something to come back to.
New cryptocurrencies are emerging every year, and they all look very exciting. The trick of the trade in the crypto ecosystem is to always invest early, so with new coins it is profitable to buy them early – ideally in the pre-sale or initial coin offerings (ICO) stages. This strategy allows early investors to profit from their assets when their prices soar.
However, it is also important for investors to research diligently before investing in any new coins. Today, there is a plethora of information related to cryptography and its predictions on the internet and readers can always opt for reliable and trustworthy sources before deciding to hop on the early bird train.
2. Role of social media
On social media, the news spread like wildfire. The algorithms of social media platforms allow users to be familiar with crypto news in real time and therefore be aware of any hype generated around a new coin.
Social media is also known for amplifying extreme views, so users pushing intense predictions like “hey, this next crypto will be worth X1000 next year and you’ll be crazy if you don’t buy it” get into your news feed immediately.
At first, a cautious and observant investor might be apprehensive about these extreme predictions, but when their news feed is filled with similar predictions about the same currency, FOMO kicks in and they ask themselves, “Is there really any downside to placing a little money in this currency, just in case? When enough people do this, you have a phenomenon.
3. Strong first quarter
Recency bias is one of the strongest psychological phenomena in existence. People quickly forget what came before. This is why they are so quick to jump on the bandwagon. When things go right, they forget any rough patches that happened before, but when things start to go south, it will seem like things were never so good to begin with.
According to Robinhood’s Q1 Crypto Trading Report, there is a massive increase in the amount of money circulating on this exchange. It’s safe to assume that most major exchanges are seeing the same positive increase, meaning the first quarter of 2024 was quite strong. In investors’ opinion, there is no reason why the second quarter of the year should be any different.
Whether or not this will be the case remains to be seen, but a good first quarter is enough to influence market sentiment. With this in mind, investors will enter the second quarter much more confident, which means they will be willing to spend more.
4. Media exaggeration
It’s no longer just social media and crypto communities that fan the flames. The news-hungry mainstream media is getting into the game. After all, large portals belonging to renowned newspapers are as desperate for clicks and shares as small independent blogs. This makes them look for anything interesting, and in recent years, cryptocurrencies seem to be the topic that is too profitable to ignore.
Reports from legacy media platforms add much-needed credibility to a crypto hype, especially when you are an investor older than the GenZ generation.
5. Peer pressure
When things start to go well, everyone is buying. This increases FOMO because it brings you into your own social circle. Now, it’s no longer about people on the internet making money while you wait in the wings. Now, it’s your gym buddies, your Uber driver, and your plumber who are making money while you weigh your options.
You don’t want to be the only one left behind, right?
Remember that even a large number of people can (and often have) been wrong in the past. The problem is that people believe in the concept of safety in numbers, which is a huge fallacy. It turns out that if a lot of people start investing, the market share of individuals will be smaller, which should make the market less volatile. If the entire market is controlled by three players, a single decision (and humans can be very irrational) will shake it to its foundations.
6. Innovative technology
The main reason why cryptography is making huge strides now (as opposed to a few years ago) is because there is more cryptographic technology than ever before. Now, most of these coins have some underlying utility.
AI coins, for example, are tokens that secure certain platforms and AI resources on those platforms. The greater the value of these platforms (which is linked only to the use of the technology and its capacity), the more powerful it will be. This adds more fuel to the FOMO.
Combating FOMO in Investment Decisions
The fear of missing out (FOMO) can be a powerful force in investing, but it’s crucial to understand that it’s just one piece of the puzzle. While FOMO can lead to impulsive decisions, it can also point to potentially profitable opportunities. The key is to separate the hype from reality.
Take Bitcoin (BTC) from January 2017 as an example. Investors experiencing FOMO may have jumped in without adequate research. However, for those who have already done their due diligence, the price increase could have been a confirmation of their investment thesis.
Bottom line: don’t let FOMO dictate your investing strategy. Use it as a stimulus for further research, but always make informed decisions based on careful analysis rather than fleeting emotions.