What is Crypto FOMO and how to avoid it

2022 took a drastic turn for the worse for investors of all types. After a period of accommodative monetary policy by the Federal Reserve, interest rates are raised to combat inflation. The good times are over (for now) for risky assets like cryptocurrencies and high-growth stocks.

This begs the question: How can investors avoid FOMO when it finally makes its comeback? And what is FOMO, by the way? Here’s what you need to know.

What is FOMO?

FOMO is an acronym for “fear of missing out.” It is a feeling of anxiety that is often felt when others are well (or talk about being well). In the cryptocurrency industry, many investors got FOMO in 2020 and 2021 when many crypto prices rose. These sentiments were reinforced by frequent social media posts from people extolling their incredible life-changing investment returns from buying the right crypto or digital asset (like NFTs) at the right time.

FOMO in crypto and investing explained

The human brain is wired for social experience. In the right dose, FOMO is a healthy feeling that makes us seek out friendships or motivates us to try new experiences.

But FOMO can appear in all kinds of situations where it is not so positive. Investment is one such area. Over short periods of time, markets are dominated by two basic human emotions: fear and greed.

Frequent observation of other people making a quick fortune, especially when trumpeted on social sites or among peers, can lead to emotional decisions. FOMO can motivate some investors to follow the crowd on a popular crypto project or other high-growth investment without fully understanding the risks involved. But fads are common in the investment world. What rises in price one moment can quickly fall, and FOMO (fueled by collective greed) can transform from fear of missing out on the fun to fear of losing hard-earned money.

The market turbulence so far in 2022 illustrates this. Many formerly high-flying crypto investments have lost support among early fans, leaving latecomers to the holding party as prices plummet.

How to avoid FOMO

Fear and greed move markets (stocks, cryptos and the like) in the short term and trying to chase the current emotions can lead to disaster. But overcoming our basic human desires is easier said than done. Here are four exercises to avoid FOMO in investing when the next bull market arrives.

1. Understand that investing is about the long term

Becoming educated about an issue is often the best cure for FOMO. So here’s an important truth from one investor to another: Investing requires patience to take the long view.

FOMO is often stirred up by those trying to make a quick buck. But short-term investment decisions are the realm of traders, which is a very different thing than making a passive investment in an asset many years into the future. When deciding whether to buy into a cryptocurrency or another trending stock that’s attracting a lot of attention, ask yourself if it’s something you wouldn’t mind owning for years to come—or if buying is just a emotional reaction in the moment.

Once you’ve decided an investment is worth some of your savings, it doesn’t hurt to dip your toe in the water first. If a crypto or stock is roaring higher due to other investors’ FOMO, it might make sense to start dollar cost averaging a very small portion of your money in the investment, perhaps on a monthly or quarterly basis.

2. Focus on goals, not just making money

Having money for the sake of having money doesn’t make much sense. What is the money for? In other words, what is your plan? Saving and investing have a purpose, from preparing for a major purchase (car, home, etc.) to planning for retirement (or any “optional” period in life).

Before you drop a coin on a fundraising scheme, do a mental review about the purpose of earning the money. Or, better yet, write down your goals and reread them. FOMO can lead to a boom-or-bust investment. Perhaps a very small part of your money is appropriate for such a decision, but imagine a scenario where a large part of your investment loses value. Ask yourself if this is an acceptable result for what you are trying to achieve. If you’re saving for a short-term goal, you might want to take a hard pass.

If the objective is long-term, a large price swing to the downside may be fine. In fact, expect this to happen often with any investment. Actively thinking about investments going wrong and whether it aligns with your goal is an important step in risk management and avoiding FOMO-driven decision making.

3. Build a portfolio, not a collection of hot tips

As previously mentioned, it may make sense for you to include a small percentage of your investments in higher risk but potentially higher return investments – especially if you have many years or decades to go before you need the money. However, avoid the urge to put together a portfolio of “hot tips” you find on social media or collect from your peers.

Instead, build a portfolio of quality investments built on a long-term thesis. Consider that growing and profitable businesses benefit from secular trends rather than short-term fads. Once you have assembled a core group of companies, thereafter consider putting in some more speculative growth investments that may be able to build a sustainable business model over time.

4. Everyone has an agenda, and it rarely has your best interests in mind

Here’s one last way to avoid FOMO: Think about the source of your investment idea before accepting a high-risk investment.

It can be difficult, even impossible, to discern the motives of investors who trumpet their enormous returns on the Internet. During the height of cryptomania in 2021, many crypto projects were later discovered to be pump-and-dump schemes. Even if an investment is legitimate, consider the source. Could it be that this particular investor (or trader) has a different risk appetite than you or has a different set of goals that may have a much longer time horizon than yours? Can they also simply lie about an investment’s benefits?

When in doubt, combat investing FOMO by spending some time away from social media and other virtual interactions where it can be harder to discern someone’s intentions. Give a potential investment some serious thought, talk it over with family or friends or another trusted person, and try to come to an objective (not an emotional) decision. In the end, you know your financial situation best, so don’t let other people’s abundance make you take actions you may later regret.