How FUD Affects Cryptocurrency Prices
If you don’t already know what FUD stands for, it’s simply an acronym for “fear, uncertainty, and doubt.” The impact of FUD on the cryptocurrency market can be quite immense, especially when compared to other traditional markets. Here is a closer look at FUD, and all of the ways that it impacts cryptocurrency prices.
What causes FUD?
FUD in the cryptocurrency market can be caused by many different factors. There are, however, three things in particular that seem to create the most FUD which include: government regulation or rumors of government regulation, prominent members of society denouncing or speaking negatively about cryptocurrencies, and sharp decreases in cryptocurrency prices.
Government regulation/rumors of government regulation
The cryptocurrency markets are still in their infancy. As a result, many nations are grappling with how to regulate them. Some countries, such as Japan, are very supportive of them, and have even given them full currency status while others, such as the United States, consider them assets as opposed to currencies, and tax them accordingly. A number of nations, including Ecuador, have even completely banned Bitcoin and other cryptocurrencies all together.
It goes without saying that a nation banning Bitcoin or other digital currencies is not good for the greater cryptocurrency market. This is because bans limit the amount of people buying into cryptocurrencies and reduces the market size. So, whenever news comes out about another nation contemplating banning cryptocurrencies or regulating them heavily, it often creates FUD.
A perfect example of this is when China announced in September of 2017 that it was going to Ban ICO’s. On September 3rd, 2017, Bitcoin was trading at around $4,500. On September 4th, the Chinese ICO ban was announced. The price of Bitcoin instantly dropped and was trading at around $3,600 one week later. This was a roughly 20% drop created by Chinese FUD.
Prominent People Denouncing or Speaking Negatively About Cryptocurrencies
When famous, or otherwise influential people speak out against cryptocurrencies, it can also create large amounts of FUD. This is especially true if the person is highly regarded in the tech or finance industries. Famous people who have spoken out against Bitcoin or other cryptocurrencies include Warren Buffet, CEO of Berkshire Hathaway Inc., Brian Moynihan, CEO of Bank of America, and Ben Bernanke, former Chairman of the US Federal Reserve.
All of these men, and a number of other prominent people have publicly denounced or spoken out against Bitcoin. However, there is one person in particular who has been especially critical of cryptocurrencies, and whose comments have created extremely high levels of FUD. That person is Jamie Dimon, CEO of JP Morgan Chase and CO. Jamie Dimon famously stated that Bitcoin was a “fraud that will ultimately blow up,” and that it is only suited for use by “drug dealers, murderers, and people living in North Korea.” After Jamie Dimon made these statements in the press, Bitcoin subsequently dropped 6%.
Jamie Dimon has since reversed his stance on Bitcoin and stated that he “regrets calling Bitcoin a fraud. The blockchain is real. You can have cryptodollars in yen and stuff like that.” Even though he has reversed his stance, it still didn’t prevent him from creating a lot of FUD around cryptocurrencies and moving the price downward.
Sharp and Sudden Decreases in Cryptocurrency Prices
Although sharp and sudden decreases in cryptocurrency prices are often the consequence of FUD, they can also be the cause of it. The cryptocurrency market has proven itself to be extremely vulnerable to sudden market drops. The reverse is also true, and sometimes the cryptocurrency market shoots up without warning.
When prices swing the wrong way, it can create a lot of turmoil. This causes new investors who are not used to the volatility to panic sell, which causes prices to drop even lower. Sometimes it can take weeks or even months for the crypto markets to recover after a large negative price swing.
Sharp and sudden decreases in cryptocurrency prices have generally proven themselves to be temporary, and the markets tend to recover, often reaching new highs every time. However, a lot of people make the mistake of selling all of their assets when these panic sell-offs happen. Cryptocurrencies are especially vulnerable to panic sell-offs and FUD because they are brand new assets which are not regulated well.
Why FUD Can Have Such a Powerful Impact on Prices
The reason why FUD can have such a big impact on the cryptocurrency market is because it sends a signal that either something might be wrong with the market or that vast numbers of people may soon be getting out. For example, China’s ICO ban and subsequent cryptocurrency exchange ban sent the message that millions of Chinese citizens would most likely sell their cryptocurrencies because of the new regulations which would make it extremely inconvenient to trade cryptos in the country.
The Jamie Dimon comments sent the message that something was wrong with the market. Jamie Dimon has a very high level of influence in the financial world, considering that he is the CEO of one of the largest and most powerful banks in the world. When he called Bitcoin a fraud, many people had second thoughts, believed him and started selling their digital assets.
Sharp decreases in price give the impression that something is wrong with either the entire market or specific elements of the market, and that vast numbers of people may soon be getting out. In part, this is because the steep decreases in cryptocurrency prices resemble stock market crashes. They are overwhelming to many people, and when they happen it can look as if the market is about to collapse entirely. Many people simply cannot handle the volatility, and sell their digital assets to escape the FUD. Although this is considered a novice move by many Bitcoiners and long-term cryptocurrency investors, it still occurs and does so on a seemingly regular basis.
Opportunities Created by FUD
FUD often creates major price drops which cause a lot of people to lose money temporarily, but they also create opportunities. For people who are savvy and patient enough to wait for FUD to occur, ideal buying points can be generated. This is because of the obvious; it is always more profitable to buy at the lowest price and sell at the highest price.
If FUD drops the price of Bitcoin 40%, it can create an incredible buying opportunity for those who have the cash on hand to pick up the asset. Buying cryptocurrencies after a FUD-created price drop is sort of like buying stocks after a major crash. Many stock investors view stock market crashes as a sort of “sale,” which is a limited-time only reduced price buying opportunity for stocks.
For those people who are prepared to capitalize on FUD, substantial gains can be made. In fact, waiting for FUD can be so profitable that many professional traders specifically include it in their trading strategies. On the other hand, it can be difficult to perfectly time the FUD cycle because it is not always clear where the bottom of the FUD price drop is.
Will FUD Ever Stop in the Cryptocurrency Market?
There is a very good chance that FUD in the cryptocurrency market will be reduced significantly in the next ten years. By then, most nations will have finalized their stances and regulations about cryptocurrencies so there will be a decreased risk of major news stories coming out once every month or about a new country who suddenly decided to ban cryptocurrencies. Also, cryptocurrencies should have enough time to either prove themselves as an asset class, or as a failure by that time.
Many people have called cryptocurrencies a bubble, and have compared them to tulips during the tulip mania in Holland during the 1630s. However, the tulip bulb mania only lasted for approximately three years. The price skyrocketed and then fell to almost nothing in that brief period. Cryptocurrencies are going on ten years of existence, and the cryptocurrency market capitalization has mostly been going upward during that time, with a few notable sell-offs.
If the total cryptocurrency market cap continues to rise over the next five to ten years, then many of the fears that it is a modern day tulip mania or “the biggest bubble of all time,” will subside. If this happens, then the FUD cycles will most likely be considerably less significant. Of course, there is still the possibility that the entire market could implode before cryptocurrencies fully establish themselves as a legitimate asset class, but that seems incredibly unlikely at this point.
In fact, it seems much more likely that cryptocurrencies will become an asset class that rivals precious metals, at the very least.
Final thoughts on FUD
All markets go through some degree of FUD. The cryptocurrency market unfortunately, is currently going through a much higher rate of FUD than most markets. This is primarily because cryptocurrencies are so new that every time bad news comes out about them, many people literally fear that the entire market will be reduced to zero.
The volatile FUD cycles are difficult for the average investor to cope with. However, the steep gains that are commonly seen with cryptocurrencies are enough to keep many of them in the game. A lot of people view the intense price volatility around cryptocurrencies as the inevitable birthing pains of a market that is coming to life.
Because of the advanced technology and extreme utility of cryptocurrencies, it is possible that they could be around for hundreds, or even thousands of years. Cryptocurrencies are similar to precious metals after all, and precious metals have been used as a store of value for thousands of years and counting. If cryptocurrencies can just get through their first few decades, then people will most likely stop viewing them as an asset that could die at any second, and will slowly but surely start to view them as a reliable way to store wealth long-term.
If this shift of perception happens, then much of the FUD will vanish, no matter which bank CEO criticizes a given cryptocurrency. However, no market is completely immune to FUD. People who are concerned about FUD may do well to learn how to use it to their advantage and view it as buying opportunity, rather than a crisis. With that said, the market will still need to be timed correctly for people who want to capitalize on FUD to buy at low prices.