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FOMO (Fear Of Missing Out) is real, just like its consequences. Understand this popular Bitcoin slang and learn how to avoid being influenced by it.
Financial markets, especially Bitcoin, can be highly volatile at times.
The price of BTC in dollars can swing up or down by 5% in less than 24 hours, making its use as a currency more complicated. This can also lead to financial losses for the most nervous and impatient investors.
Indeed, during certain periods, as Bitcoin’s price rises sharply or appears preparing for a major surge, it suddenly changes direction. This causes panic selling by the latest buyers or liquidates leveraged positions of investors following the riskiest strategies. It’s often said that this shift in direction "traps" those who fell into FOMO.
FOMO, or "Fear Of Missing Out," is a phenomenon that occurs when an investor buys in a panic, fearing they’ll miss out on a buying opportunity and a significant upward price movement in an asset.
For example, when El Salvador adopted BTC as legal tender in 2021, the average investor might have believed that such news would attract more investors and push Bitcoin’s price to new highs, possibly even reaching $100,000.
However, on the day the "Bitcoin Law" came into effect, September 7, 2021, BTC dropped by 19.56%, falling from around $53,000 to $42,500. Additionally, 2022 saw a decline of about 77% in BTC’s price, causing significant losses for investors who rushed to buy Bitcoin.
This can be explained primarily by the fact that financial markets, and especially Bitcoin due to its relative youth, are influenced by liquidity flows in both the derivatives and spot markets.
Thus, when a large number of investors buy with leverage over a short period, the price tends to drop to liquidate these positions for 3 main reasons:
1. Market makers and exchange platforms have an incentive to liquidate these positions because they profit when liquidations are executed.
2. It can also be explained by the fact that long (buy) positions are essentially promises to sell. In other words, when you open a long position, you’re buying and promising to sell if BTC drops to a certain price, to your stop loss (SL) or your liquidation price. Conversely, short (sell) positions are promises to buy, which is why when prices rise sharply, we can see rapid and significant price movements due to all the short positions being bought back.
3. Similarly, if you simply bought in the spot market without a precise investment strategy, you might be driven to doubt your decision and sell after a significant drop to minimize your losses. In this scenario, the BTC you sell will be bought by other investors.
Indeed, if you're able to make these sales, it's because there's someone on the other side buying. And when significant price movements occur, accompanied by large sell-offs, the price drops, allowing more rational and long-term investors to buy at lower prices.
Thus, it is when public sentiment is most optimistic that Bitcoin tends to peak, and on the contrary, when sentiment is at its most pessimistic, Bitcoin tends to hit its lows. This creates a reverse mechanism to FOMO, simply the fear of losing too much and having to hold onto an investment stuck in a negative unrealized gain.
Generally, you can recognize FOMO periods when every beginner who makes a 10% profit talks about it everywhere, thinks he’s a genius, changes their profile picture to DiCaprio in The Wolf of Wall Street, and starts offering free courses on how to draw support and resistance lines knowledge they themselves likely copied from a freely available PDF on Google.
How to Avoid Falling into FOMO?
To avoid finding yourself in a situation where you've invested everything at the wrong time, either at a peak or what you thought was a dip, it's essential to adopt a less risky strategy.
Of course, it's easier said than done. But the only way to prevent significant losses and avoid reacting impulsively is to remain almost indifferent to short-term price movements.
When entering the world of investing, we're often told to only invest what we're willing to lose. However, in my opinion, if you're ready to lose what you're investing, you'd be better off gambling at a casino where your chances of quick gains are much higher. Instead, you should care about the money you're investing and not be indifferent to your actions. That said, you shouldn't invest money you need for essentials like food, rent, or an ongoing project, hoping for quick profits. The sad truth is: you will probably lose this money.
As for Bitcoin, it all depends on how you view BTC's significance. For many, it's just an investment, but for a growing portion of the global population, Bitcoin is becoming a necessity.
Bitcoin can protect you from many things, such as inflation, government censorship, or bank failures. If you're affected by these issues, then going all-in on BTC is probably the best strategy you could adopt.
However, if your life is comfortable, like most citizens in the West, a more measured approach makes more sense, such as setting up a DCA strategy that could replace your savings and/or life insurance.
DCA, or dollar-cost averaging, is a strategy where you invest small amounts regularly to buy BTC at an average price, helping protect you from its volatility.
Check out our explanatory article on what DCA is.
Finally, FOMO is a common phenomenon that even affects experienced investors.
After reading this article, you’ll have several ways to protect yourself from it, but most importantly, you'll need to take a step back before every decision. The best way to do that is by setting up a clear strategy in advance, whether it’s DCA or something else, to avoid acting on emotion and making a mistake you might regret.
