FOMO, or Fear of Missing Out, is a psychological phenomenon in trading and investing where individuals feel compelled to join a popular trend due to the fear of missing potential profits.
#NOTE: Not to be confused with FOMC (Federal Open Markets Committee).
In crypto markets, this fear often arises when traders observe rapid price gains in assets which was seen in late 2021 and early 2024, especially in speculative spaces like memecoins. Fueled by the desire to capitalize on short-term gains or due to fear of missing a perceived “golden” opportunity, FOMO can lead investors to buy assets impulsively, often at inflated prices.
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How Does FOMO Works in Crypto Markets?
Crypto markets are highly vulnerable to FOMO because in the race to beat the markets, every second you lose is an opportunity gone. This is further amplified by social media, where influencers, hype campaigns, and viral trends can influence large numbers of users.
As a result, FOMO can drive prices up very rapidly, creating a bubble (like in TRUMP Coin) that might soon collapse, leaving many latecomers with significant losses. Sometimes users do trap newcomers purposefully to secure their own exit, like we saw in the Melania memecoin case.
FOMO can also happen in the case of large cryptocurrencies like Bitcoin where users buy at the end of a rally in hopes of further price gains. As the rally withers, those who bought at the top are left with higher prices that takes years to come. This happens almost after every rally in the markets.
Triggers of FOMO:
- Social Media Hype: Platforms like Twitter, Reddit, and YouTube are common spaces for crypto discussions, where influencers or communities can promote projects, sparking interest.
- Market Pumps: Rapid price increases in projects with little fundamental value can attract speculative attention, leading to a domino effect as more buyers join the trend.
- Celebrity Endorsements: In some cases, celebrities or public figures endorse projects like World Liberty Financial by Donald Trump, which can trigger widespread FOMO, drawing in audiences outside the crypto-native crowd.
How Experts Use FOMO to Short at Higher Levels
Experienced traders like me use FOMO-driven cryptocurrencies to make shorts and profit from this misplaced euphoria.
To make sure we do not incur losses, we place a stop-loss at 5% of our drawdown.
Steps Experts Take:
- Monitor Social Media Activity: Experts analyze trending coins on social platforms and monitor mentions, discussions, and sudden spikes in popularity. Analyzing social metrics helps them gauge when FOMO is influencing buying decisions, often pushing prices to unsustainable highs.
- Assess On-Chain Activity: To distinguish hype-driven price pumps from genuine growth, experts examine blockchain data, looking for metrics like increased active addresses, transaction volumes, and protocol development activity. When price action is unsupported by on-chain fundamentals, this discrepancy signals a potential short opportunity.
- Timing Short Positions: By entering short positions during peak hype, experts aim to capitalize on eventual price corrections as FOMO fades. This strategy is especially effective in memecoins and highly speculative projects, where initial excitement can quickly dissipate, leading to sharp sell-offs.
- Managing Risk: FOMO-driven trends can be unpredictable, so experts often set tight stop-losses and watch market sentiment closely to adapt if trends gain more traction than anticipated.
Don’t Get Carried Away
Events like market highs tend to make users euphoric and I have seen many such users get trapped in higher levels. Therefore, it is always wise to let the markets cool down by at least 20% before investing despite all-time highs.
Even institutional asset managers such as El Salvadore’s government got caught in such a bull-trap and bought crypto at $47k in March 2022. They got trapped and had to wait for another two years to break even.
