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Effects of FOMO on the Cryptocurrency Market

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FOMO

Cryptocurrencies are one of the biggest markets operating on a global scale. Being a global market, they get influenced by a large number of factors. Some of these factors include the legal and political regulations, economy’s current state, new technologies, the supply and demand of the currency, etc. However, there is one big factor that strongly impacts the crypto market, more than other financial markets.

This factor is abbreviated as FOMO.

Understanding FOMO

The millennials have coined the term FOMO, as an acronym for the “fear of missing out.” This feeling called FOMO is a big influencer for the investors that occurs during specific buying opportunities. Such opportunities which promise gigantic gains create this particular fear and start making investors concerned.

FOMO doesn’t just influence the cryptocurrency market, it’s also prevalent other financial trading areas. However, its greatest effects are seen in the crypto market.

What makes FOMO influential in the crypto market

As stated above, the crypto market is the domain where FOMO shows the highest influence. The reason behind its tremendous influence is that some cryptocurrencies have shown the largest gains in the history of financial markets. An example of such digital tokens includes Bitcoin, Litecoin as well as Ethereum. As occurred in Bitcoin’s case, the coins grew from being worth hardly a few cents to tens and thousands of dollars.

Due to such skyrocketing rise cases, most investors expect every other digital coin to present an immense growth opportunity. As a result, none of the traders and investors are willing to miss out on making the most of such an opportunity. Therefore, whenever the general consensus is that one specific cryptocurrency could potentially rise high, FOMO sets in. As a result, large number of people start investing in that particular cryptocurrency for the fear of missing large returns.

Moreover, the blockchain technology, which has been gaining mass adoption globally, forms the cornerstone of most crypto projects. As a result, the general mindset for this radical technology is that it would show exponential growth in the future. This kind of thinking lures more and more investors to invest in the cryptocurrency market.

When does FOMO occur?

FOMO often sets in as soon as a potentially revolutionary and successful coin is launched. This is because mostly those investors enjoy the maximum returns who make the earliest investments. This has been true in not just the case of crypto markets, but also in other kinds of stocks. Some famous examples include Google, Tesla and Apple.

Similarly, in crypto world, investors having bought Bitcoin for just $50 to $100 in 2010 might be earning millions of dollars currently.  Such high gains instill fear among investors; what if a similar case occurs with other coins and they miss out. Therefore, one positive crypto case sets a positive expectation for all others, fuelling FOMO.

Positive Effects of FOMO on the Crypto Market

One of the most glaring beneficial effects of FOMO on crypto is its influence in driving its value significantly higher. However, it is not just the individual coins that reap the benefits of the FOMO effect. It is the entire crypto market that largely derives benefits from this phenomenon. As a result, currently there is an exponential rise in the number of people trying to invest in cryptocurrencies.

The rising user base of most crypto exchanges paints a clear picture of its beneficial effects. Known as one of the biggest cryptocurrency exchange of US, Coinbase was started in 2012. However, just within a span of six years, the company has been able to achieve more than 11  million users. The speed at which users are adding to this exchange is exponential. One such case occurred after CME group made an announcement. The announcement was regarding the addition of trading of Bitcoin futures, resulting in the single day addition of 100000 users.

This massive user rush to the crypto market resembles similar historical cases influenced by FOMO. For example, in the late 1890s, this fear drove hordes of people to mine gold in Klondike. As a result, many people call the exponential cryptocurrency rise as a modern and digital version of Gold rush. Similarly, due to related FOMO effects, many have coined the term ‘Digital gold’ for bitcoin.

Therefore, the most obvious effect of FOMO would be to continually drive more people to the crypto market. This in turn, might fuel the growth in the value of at least all the major cryptocurrencies.

Negative Effects of FOMO on the Crypto Market

The ‘Fear of Missing Out’ doesn’t just have positive effects, it is riddled with many crypto-related risks too. One of the major risks is that with FOMO, the prices of cryptocurrencies may rise at a very fast and unnatural rate. The result of this would be the considerable pullback in the crypto market, following the passing of user’s fear.

Such a case has occurred in the real world. In December, 2017, the value of Bitcoin showed an exponential rise to around $20,000. The news of the futures trading spurred that steep rise. However, as FOMO passed, the price showed a steep decline, ending at an amount of $11,000.

Therefore, there is a high potential for investors suffering from loss if they relied on the FOMO phenomenon for investing. This loss could occur in spite of the general ups and downs that have become a part and parcel of crypto trading.

Conclusion

FOMO is considered as one of the biggest drivers, fuelling the cryptocurrency growth. With its steady record in the last 8 to 9 years, there is very less chances of FOMO dying out any time soon. However, with the FOMO driven cryptocurrency rise, there has been an increase in the negative exposure on it. One of the biggest ones is the fear of governments banning crypto use and making their trading illegal. Such has occurred in smaller nations, and China has taken a similar stance against cryptocurrencies.

Therefore, if cryprocurrecies start losing their stardom, the FOMO effect would also reduce; in some cases even completely die down.

 

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