How FOMO Affects the Cryptocurrency Market
Cryptocurrencies are a global market, and just like any other market, they are subjected to the influence of dozens of different factors. They can be impacted by regulations, the present state of the economy, supply & demand, new technologies, and a number of other factors. However, unlike other traditional financial markets, there is one thing in particular that has an incredibly strong impact on the cryptocurrencies. That is FOMO.
What is FOMO?
FOMO stands for “fear of missing out.” Fear of missing out often affects the cryptocurrency market when investors start to become concerned that they are going to miss out on a buying opportunity that could lead to enormous, triple or quadruple digit gains. FOMO can still sometimes apply to other markets, not just cryptocurrencies, but it does seem to affect cryptos much more than others.
Why is FOMO So Relevant in the Cryptocurrency Market?
FOMO is incredibly relevant for the cryptocurrency market because some of the most breathtaking gains in the history of finance have been seen with these digital currencies; such as Bitcoin, Ethereum and Litecoin. These cryptocurrencies ascended from just a few cents to being worth thousands, or even tens of thousands of dollars – as was the case with Bitcoin.
Many people in the cryptocurrency investing space are well aware of the immense opportunity that still exists in cryptocurrencies today, and no one wants to miss out on the next incredible rise. What this means is that as soon as enough people think that a particular cryptocurrency has the potential to go on a big run, large numbers of people can start buying the currency because they have FOMO, and they don’t want to miss the opportunity.
FOMO is much more of a factor in the cryptocurrency market than it is in many other markets. This is because blockchain technology and cryptocurrencies are both still in their infancy, so many people believe that there is an enormous potential for exponential growth. Oftentimes, the investors who make the most money on an asset are the ones who bought in the earliest.
This historically has been true for many stocks including giants like Apple, Google, Tesla, etc. and it is the exact same for cryptocurrencies. Anyone who bought just $50 or $100 worth of Bitcoin in 2010 would have seen their BTC holdings grow to be worth millions of dollars at today’s prices. So, the enormous gains seen by some of the top cryptocurrencies help to fuel investment in other coins. That is due, in part, to FOMO.
The Bigger Picture
FOMO does help to drive the value of some individual crypto coins significantly higher. However, it is not just individual coins that benefit from FOMO. In fact, the entire cryptocurrency market at large benefits from FOMO. The market is currently experiencing something of a stampede of people rushing to get their hands on some cryptocurrencies.
Coinbase, the largest US cryptocurrency exchange already has over 11 million users, and they only opened a few years ago in 2012. The company is adding users at an incredible, exponential rate. In fact, it added over 100,000 users in a single day after it was announced that the CME Group would add Bitcoin futures trading.
FOMO is fueling the massive rush of people into cryptocurrencies. It is very similar to other historical FOMO’s, such as the FOMO that drove hundreds of thousands of people to mine for gold in the Klondike in the late 1890’s. In fact, many people believe that cryptocurrencies are a digital form of modern day gold rush. Some even go as far as to call Bitcoin digital gold.
With so many people flooding into cryptocurrencies every day, partially fueled by FOMO, there is a very good chance that the value of the cryptocurrency market at large will continue to grow for some time.
Other Factors Contributing to Cryptocurrency FOMO
Besides the fact that people see tremendous potential in blockchain technology, there are several other things that are helping to drive the cryptocurrency FOMO. The first is that at the present moment in time, the vast majority of all national currencies are fiat currencies. This means that there is nothing backing them other than blind faith. The faith of the people is all that separates a $20 bill (USD) from a $20 Monopoly bill. For all other intents and purposes, the two bills are essentially the same. They are both approximately the same size and shape, made out of similar materials, etc.
For most of history, physical precious metals, and/or gold or silver backed currencies have been the dominant monetary force. Even so, many governments view it as inconvenient to have their money tied to something tangible like precious metals which have intrinsic value. This is because having gold-backed money makes it harder to spend infinitely on wars, social programs and such.
Fiat Currencies Losing Faith
Throughout history, fiat currencies have mostly imploded due to hyperinflation. This occurs when the population suddenly realizes that their money has no actual worth other than faith, and then ironically, the people lose faith in it. So, more and more people losing faith in fiat currencies, and viewing cryptocurrencies as a better form of money could be helping to fuel the dramatic shift of wealth into assets like Bitcoin and Ethereum.
In other words, people around the world may be slowly realizing that their national fiat currencies could soon go into hyperinflation, as is already happening in nations like Zimbabwe and Venezuela. People who think like this can get serious FOMO about the opportunities to escape the risks of fiat money, and get into something safer, such as cryptos.
Digital Currencies with Smart Contracts
Besides the fear of fiat money hyperinflation, many people see other value to cryptocurrencies as well. For example, some cryptocurrencies offer smart contracts. Smart contracts are a technological breakthrough which allow parties all across the world to set up reliable contracts without the help of third parties such as bankers and lawyers. Many people do not want to miss out on the opportunities to capitalize on this technology. This adds to the FOMO surrounding the cryptocurrency market.
Risks Associated with Crypto-Related FOMO
The biggest risk of cryptocurrency related FOMO for most investors is that FOMO may drive prices up very high too quickly, and at an unnatural rate. This would most likely lead to a significant pullback once the FOMO passes. Such was the case with Bitcoin, which rose to almost $20,000 in December, 2017 on the news that futures trading would be allowed for it. Very soon after that, however, the price dropped all the way back down to around $11,000.
So, investors who rely only on FOMO to make their investments could risk making significant losses when the FOMO dies down. On the other hand, it is also worthwhile to consider that cryptocurrencies in general tend to go through both dramatic rises and steep falls. This is sort of a hallmark of this asset class at large. Over time, the trends for many of the top cryptocurrencies have been upward, which has made the so-called “hodlers,” or people who “hold on for dear life” experience tremendous gains over the years.
Will FOMO in the Cryptocurrency Market Die Out Soon?
Considering the phenomenal growth of the cryptocurrency market throughout the last 8-9 years, it seems very unlikely that the FOMO (which is largely helping fuel it) will die out any time soon. However, there are several threats to cryptocurrency FOMO. The largest of these is that governments will simply ban cryptocurrencies and make it illegal to trade them. This has already happened in some smaller nations, and there are rumors that more regulations will be put in place in larger countries like China and South Korea.
Stricter Government Regulations
If governments ban cryptocurrencies or regulate them too heavily, then it could cause investors to lose enthusiasm for these digital assets. Another threat to cryptocurrency FOMO is the fact that certain banks are now starting to resist having their customers buy cryptocurrencies with their money from their bank accounts. Banks such as PNC, Bank of America, and JP Morgan have all either, shut down accounts with Bitcoin investing activity, threatened to shut them down, or have had their leaders publicly denounce Bitcoin.
Stricter Banking Regulations
JP Morgan CEO, Jamie Dimon, even went as far as to call Bitcoin a fraud. So, the lack of enthusiasm from traditional banks and the fact that they appear willing to start taking action against people who buy cryptocurrencies through their systems could be a potential threat to cryptocurrency FOMO. It seems as though banks do not like cryptos, possibly because they view them as a threat to their own existence. After all, people who have hot or cold storage cryptocurrency wallets do not really need a bank because they essentially have their own bank account.
One last potential threat to the cryptocurrency FOMO is the fact that the cryptocurrency market is so volatile. For example, Bitcoin lost roughly 40 percent of its value between December 2017 and January 2018, and this is not the first time this has happened. In fact, many cryptocurrencies seem to go through dramatic prices changes. Many people cannot handle this roller coaster ride, and if the volatility in prices does not level out somewhat in the near future, then it could reduce some of the FOMO associate with cryptocurrencies.
FOMO is one of the most powerful factors impacting the cryptocurrency market today. Of course, it is not the only one. The FOMO surrounding cryptocurrencies is extremely strong, and has been highly significant so far. Coinbase is just one exchange, and the fact that it has added over 11 million users in 5 years is a perfect demonstration of the enthusiasm around cryptos. There are dozens more cryptocurrency exchanges besides Coinbase.
It is possible that at some point in the future, the FOMO for cryptocurrencies could slow down somewhat because large enough numbers of people have gotten into them. This could hypothetically slow down the rates of new accounts being opened on cryptocurrency exchanges.
There are billions of people on the planet, so there could be a long time before a real slowdown occurs. Until such a slowdown takes places, or unless governments all decide to ban cryptocurrencies, the crypto FOMO is likely to continue well into the future.