FOMO Fear of Missing Out
I have one “investment” project in 2022. My project is to research all things related to crypto.
Somewhere in the back of my brain I have the feeling that the crypto market is driven by FOMO.
But I cannot rely on a “back of the brain” theory to make an investment decision.
FOMO, also known as “Fear of Missing Out” is a real thing. In the investment world it is a real killer if you have it.
“Fear of missing out has an influential role for the investment market for cryptocurrencies. With the prominence of people making large sums of money through cryptocurrencies, people fear of missing out on the next get rich quick currency. This fear of missing out has caused the rise of pump and dump schemes where investors use the fear of missing out to raise the price of cryptocurrencies and sell them for a profit while lower tier traders are not able to see profits. People are using bots in these cryptocurrency trades because they fear of missing out on making potential profits as profits can vary rapidly even within the span of twenty seconds. Pump and dumps are a legal grey area for cryptocurrencies, so it is not illegal for influencers to use fear of missing out to manipulate individuals.” [1]
FOMO is not a new term but in recent years been linked to an increase in social media use, social networking, video games and investing.
How I prove or disprove this theory is going to be tricky. Human behavior does influence decision making.
In the securities markets, i.e. stocks and bonds, there is readily available public information to bolster an investment decision one way or the other.
The type of information an analyst relies on to evaluate companies does not exist in the crypto markets.
If I cannot understand exactly what cryptocurrency is, how can I make an informed decision about investing?
I can start with a few basic questions:
What is the depth of the markets? Depth can be measured by market capitalization.
How liquid are the markets? If I use dollars to buy crypto, can I sell crypto and get my dollars back?
What are the tax consequences of buying and selling crypto? Yes, you might owe taxes if you have gains or income from crypto.
Are tokens and crypto coins “securities”?
What drives prices and values in the crypto market?
One thing I know with certainty is that feeling left our is NEVER a reason to invest. If you invest based on FOMO, prepare to lose money.
Bitcoin, the undisputed originator of crypto was first launched in January 2009. Thirteen years is not a long time for an entirely new market to emerge.
Some of the informational material about crypto uses traditional investment terms like margin, leverage, options, and futures.
New to me is DeFi (decentralized finance), NFT’s (nonfungible tokens), Stablecoin, Smart contracts, Exchange Tokens and Air Drops.
Just like the stock market, investors borrow money (margin accounts) to buy cryptocurrency.
Borrowing money to buy more shares, or coins, or tokens than you cannot afford is called leverage.
It’s great when a stock price is going up but when a stock price drops precipitously, the investor may get a margin call.
If the price of the stock bought on margin goes below a certain threshold the investor is required to add money to the account.
What this can mean is that an investor sells other assets to pay for the margin call.
What if the “other asset” is cryptocurrency?
Selling crypto currency to pay for borrowed money on a stock, as stock prices are going down means crypto will go down as well.
The big “uh-oh” is that investors borrow money to buy crypto as well. And owners of crypto can receive margin calls the same way owners of stock receive margin calls.
If the investor cannot “meet the margin call’, the assets will be sold by the brokerage firm to pay for the borrowed money. Further exacerbating price declines.
At this point I am not a believer or a non-believer in the crypto markets. I am observing and learning.*
What I do know is that I do not suffer from FOMO. I’m already overwhelmed with fear of COVID and OMICRON.
COVID and OMICRON are not securities, and I would like to miss out in that market.
[1] Fear of missing out – Wikipedia
* Full disclosure I bought 10 shares of Coinbase shortly after the IPO last year. My investment is now worth half . Coinbase is an exchange for buying and selling cryptocurrency. Coinbase shares are listed on the New York Stock Exchange.
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