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Fear And Greed in Cryptocurrency: FUD for Thought and Keeping That FOMO Under Control

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You’re probably scrolling through your social media feed, staying updated on the latest crypto news, and exploring numerous new projects. As you do, you’ll come across people expressing scepticism about cryptocurrencies, while others are capitalising on market dips to trade and reap profits. So, let’s dive into it.

What exactly do FUD and FOMO mean?

Every other piece of crypto advice or information you encounter often includes these terms. We briefly covered them in our previous article on Crypto Lingo. FUD stands for “Fear, Uncertainty, and Doubt,” while FOMO stands for “Fear of Missing Out.” In essence, FUD represents fear, and FOMO is rooted in anxiety driven by greed.

FUD and FOMO: A Glimpse into Market Sentiments

FUD and FOMO reflect market sentiments. When the public is uncertain and anxious about a project, it signals FUD. This usually results from a lack of information or misinformation being circulated. Conversely, when people are anxious about missing out on a promising opportunity, it indicates FOMO.

It’s important to note that FOMO can be amplified by real-time market data and social media platforms, where constant access to price charts, news updates, and discussions intensifies the fear of missing out on potential gains. This fear is exacerbated when individuals witness others boast about their profits or stories of overnight success.

Similarly, misinformation, plus a lack of transparency and data, can also lead to FUD within the market. When there isn’t enough information and when the founders behind the project keep skirting important questions, it could lead to investors’ distrust of the project.

FOMO in the crypto world can also manifest during a bull run, a period of significant price increases across the market. As prices surge, individuals who haven’t yet invested in cryptocurrencies may fear missing out on their chance to profit from the upward momentum, leading to impulsive buying at inflated prices without doing their due diligence.

The opposite is also true when FUD racks up during a bear market, and everyone fears that their investment might not bring them earnings. During this time, new investors may find it hard to trust the projects. Also, political bodies implementing policies can also spell a recipe for FUD as people fear that regulations might restrict the crypto’s decentralised nature.

Calculating FUD and FOMO: The Fear and Greed Index

To gauge FUD and FOMO in the market, investors often refer to the Fear and Greed Index. This index generates a single number, ranging from 1 to 100. A value of 1 indicates extreme fear in the market, signifying that people are selling. Conversely, a value of 100 indicates extreme greed, with people buying enthusiastically.

As a rule of thumb, when the index value is at 1, it signals a buying opportunity. On the other hand, when the index shows 100, it’s considered a sell signal, reflecting a rush of people trying to enter a hot market at any price. However, it’s important to remember that the Fear and Greed Index is a technical indicator and does not consider fundamental or external factors affecting cryptocurrency prices.

Factors Considered by the Fear and Greed Index

The Fear and Greed Index takes into account several factors:

Volatility: It compares current volatility and drawdowns to 30-day and 90-day averages. Higher volatility is considered fearful and decreases the index value.

Momentum/Volume: The metric measures current momentum and volume in the Bitcoin market compared to historical averages.

Public perception: The index tracks mentions and hashtags for bitcoin and compares them to historical averages.

Surveys: It conducts market-wide surveys on a weekly basis, with enthusiastic survey results driving the index higher.

Dominance: The index measures Bitcoin dominance in the overall market. Higher Bitcoin dominance indicates market fear, while lower dominance signifies greed.

Trends: Google trend numbers are included in the final value. Higher search interest in cryptocurrency correlates with increased market greed.

Considerations When Using the Fear and Greed Index

Hype and Manipulation: Evaluate whether the hype is the result of market manipulation or genuine potential. Investigate the project’s background and the company behind it. Always conduct your own research.

Trader or Long-Term Investor: Determine your investment approach. If you’re a trader, the index can provide insights. Long-term investors should prioritise a steady strategy.

Tax Strategy: Be mindful of your tax strategy, especially if you’re actively trading. Short-term capital gains tax may apply to frequent trading. It’s best to check with local laws and tax consultants before deciding.

Fundamental vs. Technical Trading: Recognise whether you base your investments on fundamental or technical analysis. The Fear and Greed Index serves as a technical indicator.

Overcoming FUD and FOMO in Trading

Understand the Long Term: Investing is about the long term. Patience and a focus on long-term goals can help overcome FOMO.

Set Clear Goals: Define your investment objectives. Know what you’re saving and investing for.

Build and Diversify Portfolio: Focus on building a diversified portfolio of quality investments with a long-term thesis. You can spread your investments across different cryptocurrencies and asset classes to reduce risks.

Do proper research: Understand the fundamentals of cryptocurrencies and blockchain technology. Always research projects and platforms before investing.

Patience: Avoid impulsive decisions driven by FOMO and understand that crypto markets are volatile.

Realistic Expectations: Set realistic expectations and focus on fundamentals rather than short-term price movements.

Create an Investment Plan: Develop a well-defined plan with risk management strategies.

Check Your Info Sources: Reduce exposure to FOMO-inducing content on social media and focus on reliable information sources. Consider seeking advice from experienced investors or financial advisors.

Emotional Discipline: Train yourself to make rational decisions based on analysis, not emotions.

Challenge Confirmation Bias and Avoid the Herd Mentality

In the cryptocurrency world, it’s crucial to avoid confirmation bias and the herd mentality. Seek balanced information and make decisions based on your analysis. Remember, patience is key, as cryptocurrency investing is a marathon, not a sprint.

Take this article as some FUD for thought. No matter how much information there is out there about the latest trends and ongoings, the only reliable thing is you and your own research. It’s wise to revise, check your own investment goals, and verify information properly before falling into a pit full of hearsays.

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