What is Crypto FOMO & How to Avoid it | The Motley Fool

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

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

What is FOMO?

FOMO is an acronym for “fear of missing out.” It’s a feeling of anxiety often felt when others are having a good time (or talking about having a good time). In the cryptocurrency industry, plenty of investors got FOMO in 2020 and 2021 when many crypto prices were soaring. These emotions were amplified by frequent social media posts from people touting their incredible life-changing investment returns from buying the right crypto or digital asset (such as 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 causes us to seek out friendship or motivates us to try new experiences.

But FOMO can crop up in all sorts of situations where it’s not so positive. Investing 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 may motivate some investors to follow the crowd on a popular crypto project or another high-growth investment without fully understanding the risks involved. But fads are common in the investment world. What is soaring in price one moment can quickly fall, and FOMO (driven 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 those late to the party holding the bag as prices plummet.

How to avoid FOMO

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

1. Understand that investing is about the long term

Getting educated about a matter is often the best cure for FOMO. So here’s an important truism from one investor to another: Investing requires patiently taking the long view.

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

Once you decide 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 get started by dollar-cost averaging a very small portion of your money into the investment, perhaps on a monthly or quarterly basis.

2. Focus on goals, not simply making money

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

Before dropping some coin on a money-making scheme, do a mental walkthrough on the purpose for making the money. Or, better yet, write your goals down and read them again. FOMO could lead to a boom-or-bust investment. Perhaps a very small portion of your money is appropriate for such a decision, but imagine a scenario where a large portion of your investment loses value. Then ask yourself if this is an acceptable outcome for what you’re trying to accomplish. If you’re saving for a shorter-term goal, you might want to take a hard pass.

If the goal is longer term, a big price swing to the downside might be fine. In fact, expect this to happen frequently with any investment. Still, actively thinking about investments going wrong and whether that matches your objective 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, incorporating a small percentage of your investments into higher-risk but potentially higher-return investments might make sense for you — especially if you have many years or even decades to go before you need the money. However, avoid the desire 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. Think growing and profitable businesses benefiting from secular trends rather than short-term fads. Once you’ve put together a core group of holdings, then consider adding in some more speculative growth investments that might be able to build a durable business model over time.

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

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

It may be difficult, even impossible, to discern the motive of investors trumpeting their massive returns on the internet. During the height of the crypto craze in 2021, many crypto projects were later discovered to be pump-and-dump schemes. Even if an investment is legitimate, consider the source. Might it be that this particular investor (or trader) has a different appetite for risk than you or has a different set of goals that might carry a far longer time horizon than yours? Also, could they be straight-up lying about an investment’s merits?

When in doubt, fight investing FOMO by spending some time away from social media and other virtual interactions where it can be more difficult to discern what someone’s intentions are. Give a potential investment some extensive thought, talk about it with your family or friends or some other trusted person, and try to arrive at an objective (not an emotional) decision. Ultimately, you know your financial situation best, so don’t let someone else’s exuberance sway you into actions you might later regret.

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