The fear and greed circuit
Your editor, Harry Hamburg is away at the moment. Before he headed off, he wanted to make sure you’d read this, from earlier in the year. Considering how hairy the cryptocurrency/digital asset market has been recently, this letter is especially prescient
Have a great weekend!
All the best,
Editor, Southbank Investment Research
The FOMO vs FUD cycle: how to understand the most important price driver in cryptos
It’s an interesting time to be in cryptos.
We’ve seen new all-time highs, steep and sudden market crashes of 40% or more, and rebounds straight back up… all in the space of a week.
If you have any money in cryptocurrencies, it’s likely been a worrying few weeks. So what the hell is going on?
Well, it’s all to do with the FOMO vs FUD cycle. Understanding this simple concept is the key to good crypto investing. And to getting a good night’s sleep.
In today’s essay, I’ll tell you what it is, how it works and how you can turn it to your advantage.
If you’re not familiar with the terms – and don’t worry, most people aren’t – here’s what they mean.
FOMO stands for “fear of missing out”. It only really became a well-known term with the advent of social media. Since Facebook came about you can now see all the fun things everyone else is doing, all of the time.
FUD stands for “fear, uncertainty and doubt”. It is a manipulative tactic used by marketers. The term became popular in the 1970s, when IBM used FUD to dissuade people from choosing a rival’s product. Right now, it’s a particularly popular tactic in politics.
You can talk about fundamentals, you can talk about value, you can talk about working businesses. But like it or not, crypto is ruled by FOMO and FUD. At least at this early stage.
How the FOMO vs FUD cycle works
With the amount of money being made in crypto right now, it’s comparable to a modern-day gold rush.
The potential gains, and losses, at this early stage in the market are phenomenal.
In the stockmarket, you may make 10%, or even 15%, a year if you’re lucky. In cryptos, you can regularly make ten times this – a week, and many people do.
Everything is faster, more intense and more innovative in the world of crypto. Ordinary markets close in the early evening. But thanks to its global nature, crypto never sleeps.
That means once you hear about it, you’re struck by an instant fear of missing out.
“If I’d put £500 into Ethereum last January, I’d be sitting on over £44,000 now! What if it just keeps going up like that? I need to get in now.”
You buy in. You watch your investment double or triple in just a few weeks. It’s exciting, everyone is hugely optimistic. You start thinking this could be your ticket to true financial freedom. You start making extravagant plans for the future.
You start thinking about putting even more money in. You could take out a loan! Look at how fast the market is rising. You could pay off that loan in a couple of weeks!
And then it happens.
The price tanks. Really tanks. In a matter of days, your crypto portfolio is below your buy-in price. People are talking about a hack, a flaw in the code, a global crackdown by governments, market manipulation…
No one really knows what’s just happened. All anyone knows is they just lost half their stack. The crypto community has swung from total exuberant optimism to fear, uncertainty and doubt. And it all happened in a matter of hours.
The downward slide continues. And you watch as your stack dwindles, day after day.
Maybe you were being totally foolish to think making money could ever be so easy. Maybe it really was all just a pipe-dream, or even a Ponzi scheme. Maybe you should sell while you still have any money left at all.
So you do it. You sell. Maybe you plan to buy back in even cheaper, or maybe you just want to wait it out a little.
And then it happens.
Out of nowhere the market bounces, really bounces. It’s up 20% in an hour. You missed your chance to buy back cheaper. It’s way up from where you sold off. What if it keeps going up like that.
You should buy back in. You’ll have lost a bit, but that doesn’t matter. If it goes back to where it was before the crash, you’ll comfortably be in profit.
You buy back in. The market continues to fly. It hits another all-time high…
And then it happens…
The FOMO vs FUD cycle continues, ad infinitum.
Once you understand, and expect this cycle. It makes the world of crypto make a lot more sense.
Why it happens
Cryptocurrency markets are unregulated. They are global. And they never sleep. This means they are rife with manipulation.
People often talk about “whales” manipulating the market, usually at the expense of “weak hands” or “normies”.
Here’s how it happens.
A whale is a person with a huge amount of money at their disposal. They have enough money to move the market.
Because many cryptos start out so cheap and become so expensive, early investors can become whales fairly easily. They are usually early investors, or just people with an awful lot of money.
If they want the market to tank, they make a number or big sell-orders below the current market piece. This can make the market drop very fast.
This then triggers people’s automatic sell orders and sends the market crashing even further.
Then ordinary investors see the market is tanking and the FUD cycle I talked about above gets going.
To make things worse, the whales usually time their big sell-offs to coincide with bad news, or rumours. For example, all the China FUD in September.
The “normies” and “weak hands” are the people particularly prone to selling in these crashes.
Weak hands tend to have put in money they cannot afford to lose, and so can’t risk waiting out the crash. They are forced to sell.
Normies are people who heard the market it flying and want in. They haven’t done much research and don’t understand the bigger picture behind the crypto revolution.
Normies believe the mainstream press on bitcoin and are sure all this crypto nonsense is a bubble looking for a pin. But they also don’t want to miss out on the huge gains on offer. So when their suspicions are proved right and the market dips, they think it’s the end and they sell.
This is why many of the crypto community talk badly about “weak hands” and “normies”. If it wasn’t for them, there would be fewer crashes and the crashes wouldn’t be as deep.
However, normies and weak hands are also the very same people FOMOing back in when the whales put in some big buy orders and send the market rebounding.
They are the fuel that powers the FOMO vs FUD cycle. And they are the ones bringing the majority of money into the market.
So although they get a lot of flak, they are the ones sustaining the market. They are the ones selling low and buying high. They are the proverbial impatient handing their money over to the patient.
As blockchain technology matures, it will create value for itself with world-changing applications and businesses. It will be less based on rumour and speculation and more on actual working businesses. That time is coming, fast.
But for now, it’s the speculators driving the market. So you can expect the FOMO and FUD cycles to continue. And this means you can turn it to your advantage. Here’s how…
Five key takeaways from the FOMO vs FUD cycle
1. Only invest money you can afford to lose.
Yes, you hear this all the time. But there’s a reason for it. If you’re only putting in money you can do without, you can afford to hold through the dips and not miss out on the rallies.
This is how you avoid being a weak hand and it’s your main line of defence against market manipulators.
2. When buying in, use dollar-cost averaging.
Dollar-cost averaging basically means buying a certain amount every week or month, no matter what the price is at. That way, you don’t need to try time the market.
Let’s say you decide to put £500 in. You could dollar-cost average your buy by putting in £100 a week over five weeks.
The reason this tactic works well in the world of crypto is it’s incredibly difficult to know how long a run or a crash will last. If you try the market there’s a good chance you’ll end up buying high and selling low.
3. Keep a stack of cash ready to buy.
That being said, it’s a good idea to hold back some of the money you plan on putting in. This lets you take advantage of the wild swings we see in crypto.
So, to use the above example, you could dollar-cost average the first £400 of your £500 investment and hold the last £100 back. Then if your chosen crypto takes a massive hit in value, you can use that last £100 to buy in at a very cheap price.
Although, this tactic means you’ll need to hold your nerve and buy through the FUD.
4. Have some price targets in mind.
It’s a good idea to have some buy and sell prices in mind. So decide what price you’ll be happy selling at and when your crypto hits that number sell a portion of it. Many people, for example, choose to sell 50% when their investment doubles in value. The idea is then you’ve made your money back, and you’re playing with the house’s money.
By the same token, it’s a good idea to have a buy price in mind. This helps you keep a level head when the FUD cycle stats. If you have a buy price in mind for the cash you were holding back, it stops you trying to guess the bottom and missing out on great deal on your chosen crypto. Again though, this one is very difficult to do psychologically, but it is how some of the best gains are made.
5. Get a news source you can trust.
As cryptos become more and more popular, more and more “experts” are jumping on the bandwagon.
Crypto investing is very different to traditional investing. The financial experts you see talking on the news usually don’t know that much about the underlying technology in crypto. That’s why time and time again they end up proved wrong.
By the same token, many of the experts in technology that you see talking about cryptos don’t understand much about the world of investing.
That’s why it’s hard to find reputable voices in the world of crypto investing. You need someone who is straddling both worlds.
Thankfully, that’s exactly what my friend Sam Volkering does. He’s one of the few people in this sphere with expertise in traditional investing and huge knowledge about cryptos. He has been writing about bitcoin for over five years and writing about tech investments in general for much longer than that.
He’s fast becoming one of the most respected voices in crypto, and has even written a book on the subject.
Until next time
Editor, Exponential Investor