What are FOMO and FUD in Cryptocurrency and Trading?

You may have heard the term "FOMO" (Fear of Missing Out) multiple times in different contexts. In the context of Crypto and Trading, it describes the intense feeling that arises when you see the price of an asset rapidly increasing while your peers are profiting.

For example, let's say there is a Token that has increased by 50% over a few days. The Telegram groups are all buzzing about it, and your friend has just made a few thousand dollars. When you look at the chart for the Token, it is filled with green candlesticks. When you see all of the positive tweets about it, you get a strong urge to buy now before it's too late. This overwhelming desire to enter the market "NOW" is what FOMO is.

Interestingly, FOMO's influence on our decision to invest in certain assets is also related to the biology of the brain. When an asset receives a lot of attention, it essentially tells your brain you are safe and will benefit from participating in that market. According to Neurologists in the Stanford School of Medicine, FOMO activates the areas of the brain that generate rewards and habits (the Ventral Striatum).

The Crypto market is a hotbed for FOMO for many reasons:

• Cryptocurrency trading occurs 24 hours a day, 7 days a week — unlike traditional exchanges, you cannot simply wait until morning to trade.
• Social Networks — A constant barrage of success stories creates an illusion of everyone around you becoming wealthy, while you remain stagnant (with feelings of self-doubt).
• High Volatility — Asset prices can experience upward spikes of 100–200% in a week, which is something not commonly seen in traditional markets.

The real problem is that poorly timed emotional purchases frequently happen at the top of a bubble, just as the "smart money" is beginning to sell, leaving the new buyer to enter the market too late. The result is total loss in their portfolio and their own case of FOMO (Fear Of Missing Out, i.e., the feeling of having missed out on the opportunity to make money) serves as a constant reminder of a bad investment decision.

What FUD Stands For

Let's first begin by explaining what is meant by "FUD". FUD is an acronym for "Fear, Uncertainty, Doubt" and, in the crypto world, it refers to the dissemination and panic associated with events or news (often highly exaggerated or completely fabricated) that spread through the marketplace result in price decreases of digital currencies.

FUD can happen by accident when a journalist publishes an article saying that a digital currency has lost 15% in value, even though at the time this article is published, it is actually just a typical price correction following an increase. Alternatively, it might be orchestrated by a large, institutional investor creating a negative news cycle from which they can purchase the digital currency below its fair market value.

Sources of FUD

• Regulatory News Ban Rumours
• Hacks/Attacks on Exchanges
• Tweets from High-Profile Celebs
• Technical Issues — Glitches or Delays in Transaction Processing

According to the Blockchain Transparency Institute, 40% of the major drops in the value of cryptocurrencies in 2023 and 2024 were caused by these "information attacks" instead of genuine fundamental problems with the assets. It is surprising that the response to threats is much stronger than the response to opportunities from a brain standpoint. Because of that, when we receive bad news about something, there are many people who panic and begin selling off everything they have to save what is left. The result is a panic effect and a series of cascading liquidations based on fear, rather than factual information.

However, it isn't always this black-and-white of FUD being a myth. Sometimes there are risks reflected in an exaggerated manner in what is commonly referred to as FUD. You will need to be able to tell the difference between "noise" in the market versus legitimate risk.

Causes of FOMO and FUD in Crypto and Trading

Psychological Factors That Contribute to the Formation of FOMO and FUD

To be frank, FOMO and FUD are emotional responses to both extreme greed and extreme fear. We have the urge to become wealthy through investing in a market. We are afraid of losing everything we have already earned or invested. Therefore, when the market is trending Up, our emotions are swayed by extreme greed. When the market is trending Down, our emotions are swayed by extreme fear.

The limbic system in our brains has existed for many years. Therefore, when we make decisions based on the limbic system, we often make emotional decisions rather than logical ones.

Nobel Prize-winning psychologist Daniel Kahneman addressed the emotional response that traders have to FOMO and FUD. In Kahneman's book, "Thinking, Fast and Slow," he explains the difference between System 1 (the limbic system) and System 2 (the logical brain). In general, we will select System 1, leading to impulsive trades.

There are several known traps that affect our mental approach:

1. Confirmation bias — We only see things that validate our expectations.
2. Recency bias — Most of the news that is reported recently will always seem more important than the longer-term trend.
3. Herd mentality — People seem to always do what the majority do.
4. Overconfidence — Success in trading has caused us to underestimate the amount of risk we take.

According to researchers from the University of California, an individual trader loses an average of 38% of their total investments by failing to control their emotion.

Factors affecting the market include: Volatility, economic news, and social media.

The crypto market has structures built to enhance the FOMO and FUD effects for many reasons:

• Volatility — Bitcoin swings 3%–5% daily and altcoin prices are much more volatile (30%–90% daily). Some coins will also swing by double-digit amounts (sometimes much larger).
• 24/7 Trading — The crypto trade markets never experience weekends or downtime; the markets run 24 hours a day, 7 days a week.
• Key Drivers of Crypto Volatility — 76% of all drastic swings in a crypto's price occur in the first 15 minutes after a major release of news.
• Impact of Social Networks on Volatility — Negative news spreads 6X quicker than the facts, which creates a feedback loop effect, commonly called the echo chamber effect.

A current example of this would be during the flash crash in October 2024 when Bitcoin lost almost 9,000 dollars of its value in about 20 minutes after false news of the possibility of a crypto ban in the US. The panic lasted a couple of hours, and in that period the price rallied back about 8,000 dollars above the moment of sale. Besides ASCN.AI clients, who had the ability to automatically use tools to place trades for profit, nearly all of the other crypto investors who panic-sold suffered significant losses.

The influence of FOMO and FUD on the way investors behave

The Mistakes Typically Made When Influenced By FOMO

Mistakes to make when you have FOMO: Buying at an all-time high (in around 75% of all instances) leads to a price drop of 20 to 30%. Ignoring risks has people placing 50% of their capital into one trade based on emotion; instead of following proper investing practices by keeping between 2% and 5% of their total portfolio for a trade alone. 89% of traders that leverage more than 10X will lose money within the first 3 months of leverage. Purchasing high-flying tokens labelled the "next Bitcoin", where 95% of these tokens are scams.

The Mistakes Typically Made When Influenced By FUD

Mistakes made when influenced by FUD; panic selling at the absolute bottom. The people that sold in the crises of 2020–2023 each missed out on upwards of 50% of their possible profits. They also abandoned a long-term investment strategy as dollar-cost averaging (DCA) and exited from this practice. Selling off top-tier assets simply because of negative news around them. Fixing losses, rather than re-balancing.

According to Fidelity Digital Assets, those who did not panic sell and held onto Bitcoin from 2015–2024 earned as much as an 18,400% return on their investment.

Examples from the Markets:

Scenario 1: The Collapse of Falcon Finance (FF) — December 2024 — The value peaked at $1.24 in a span of two weeks after rising from $0.08, then dropped within a four-hour period to just $0.11. This occurred due to a massive sell-off by team members in conjunction with a flood of FUD creating massive losses of up to 60% to 90% for most investors.

Warning: ASCN.AI client received a warning 6 hours before the flash crash of Bitcoin to short with a 1x leverage.

Example 1: Bitcoin's flash crash on 10/11/20 occurred while Bitcoin was trading at $63,000 and dropped to a low of $58,400 within 18 minutes. During this time, altcoins experienced price declines of 20–45%. The panic in the market was caused by news regarding regulation. The majority of traders who were utilizing 5x to 20x leverage experienced significant losses as the price of Bitcoin decreased rapidly. Conversely, ASCN.AI clients profited 8–40% through an arbitrage opportunity.

Example 2: A pump and dump scheme that takes place on decentralized exchanges (DEX) occurs when organized groups of traders artificially inflate the price of a token through FOMO (Fear of Missing Out) campaigns and then dump the tokens on unsuspecting investors. According to Chainalysis, traders who experienced these types of schemes lost approximately $4.3 billion in 2024. The average lifespan of these tokens during these events was approximately 14 hours.

Identifying and Handling FOMO and FUD (fear, uncertainty, doubt)

Practical Strategies to Help Manage Your Emotions

• Recognize your triggers: Before making a purchase or sale, ask yourself if the information you are relying on is factual or emotional. Take at least 24 hours to think through the situation and make a clear decision.
• Use Data and Automation to Help: Trade according to your strategy and set stop-loss orders. ASCN.AI compiles a great deal of analytical information within seconds, including information regarding the individuals behind projects, information from social media, and metrics that can assist traders in making balanced decisions.
• Eliminate the Excess Noise from Social Media: Reduce your time spent on Telegram, unfollow 'alarmist' posts, and follow verified news sources only.
• Take an Emotional Time-Out: If you feel the urge to act, pause your trade for at least 15 minutes. Take a step back from your screen, return to evaluate your emotions and make a sober assessment.
• Keep a trading journal: Use it to note why you purchased or sold, how you were feeling, and what ended up happening. This will help correct mistakes in the future.
• Invest only what you can afford to lose: Never invest more than five to ten percent of your total assets in one trade.

Disclaimer: These are simply helpful ways to start thinking about how to get your mind right before you make a trade; they do not constitute any sort of financial advice.

• Set goals and risk tolerance: Please create a written record of what kind of return on investment you want to achieve, and what your maximum possible loss will be. You will also want to determine how much of your overall portfolio will be allocated to high-risk investments.
• Diversify your portfolio: You should distribute approximately 40–60% of your capital into top-tier cryptocurrencies; 20–30% into altcoins; 10–20% into popular coins (hyped coins); and 10–20% into stablecoins (for flexibility).
• Develop rules for when to enter and exit trades: For instance: Only enter trades that have gained greater than 50% in value since their last price point without a solid reason to do so. Also make sure to set take-profit and stop-loss orders.
• Automate your trading: This can be done through order subscriptions, trading bots, and A.I. analytic tools. In addition, ASCN.AI has provided you with all the tools necessary to create scenario models and trade alerts without writing any code.
• Back-test and continually evaluate your trading strategy: Review the historical performance of the strategy and evaluate the mistakes made and use this information to revise the strategy at least quarterly.

Market Hype vs. Panic

Market hype occurs when all of the participants rush into buying an asset prior to the market rising and therefore ignoring the inherent risks associated with the investment. One of the best examples of this occurred in 2017 when Bitcoin peaked at $20,000 followed by a prolonged decline.

Market panic occurs when a large number of investors suddenly rush to sell without a tangible reason for their actions. Periods when people are already prepared to buy at discounted prices can provide the best investment opportunities. For instance, Bitcoin dropped 60% in March 2020 as a result of the Covid pandemic.

The Speculative and Manipulative Nature of the Crypto Market

Due to the relatively unregulated nature of the Crypto market, many speculators take advantage of this angle of an unregulated marketplace to profit from their efforts:

• Pump and Dumping — Group of investors pump up the price of an asset by creating hype and then sell at profit.
• Wash Trading — They create the illusion of activity around their assets by creating FOMO through large trade volumes.
• Spoofing — Placing buy/sell orders large enough to mislead the market and waste time before they cancel.
• FUD — Create and disseminate negative media articles to create negative sentiment around an asset, creating panic selling and a subsequent opportunity to purchase at a lower price.

An example of this is Elon Musk's tweet in May 2021 that resulted in a 15% decline in Bitcoin in just one hour! Always verify your sources, examine on-chain information, and take advantage of tools including ASCN.AI, which have AI-assisted analytical capabilities to avoid falling victim to fraudulent trading activity.

Frequently Asked Questions (FAQs)

What is FOMO and how does it manifest?

FOMO is defined as the Fear Of Missing Out, the feeling of urgency to invest in a growing asset before the price increases from significant volume. This psychological need often leads to purchasing the asset at the very top and possibly losing all their capital.

How Does FUD Impact Cryptocurrency Prices?

FUD is created when individuals create or spread rumors or false information that lead to mass panic selling of crypto assets. FUD creates instability and uncertainty within the marketplace, leading to mass liquidation of positions, decreasing liquidity, and damaging the reputation of crypto projects.

Have FOMO and FUD been Used to Develop Trading Strategies?

Yes, if you understand how to properly take advantage of these emotions, they can be effective strategies for experienced traders. During periods of FOMO, experienced traders will take profits or begin shorting assets; conversely, during times of FUD, they will accumulate promising assets at a lower price. Many traders use tools, such as the Crypto Fear and Greed Index, to help gauge the market's sentiment towards an asset.

FOMO (fear of missing out) and FUD (fear, uncertainty and doubt) are not figments of our imagination; they are very real psychological factors that can have a substantial impact on the cryptocurrency market. Keeping your emotions in check and reacting to them in a conscious manner can help you become a successful trader and investor. Remember that creating a game plan and executing it with conviction is much more important than trying to ride hypes or panic!

Mistakes Commonly Made When Responding to FOMO and FUD

• Extravagant leveraging — Liquidation due to lack of stop-loss orders; around 92% of traders lose their positions due to this error.
• Unsystematic averaging down — Purchasing an asset repeatedly while its price continues to decline without conducting any analysis will eventually drain your account.
• Following someone else's advice or opinion — Often, the opinions of others can entrap you into making poor investments; always do your own research and verify information.
• Disregarding reversal signals — Relying too heavily on the belief that prices will continue to rise without diversifying will result in heavy losses.
• Lack of an emergency plan — Since the market is unpredictable and operates in a vacuum, it is better to have a contingency reserve at all times and know how to react when something unexpected occurs.

Expert Opinion — How Professional Traders Use FOMO and FUD

"I do not see FOMO or FUD as the enemy; I believe they are tools to be utilized by me in a strategic manner to gain an advantage over other investors. I never trade or invest with my entire portfolio; I always hold a portion of it back and conduct all of my analysis through ASCN.AI." This helps me stay calm and avoid impulsive mistakes while pursuing my goals.

Differences between FOMO and FUD

FOMO (Fear of Missing Out) is caused by emotions such as greed (fear of missing out on a great opportunity) and is most common in an upward trending market, with signs of euphoria and excitement about prices increasing. FOMO occurs when traders buy, based solely on emotion, likely towards the top of that market.

FUD (Fear, Uncertainty and Doubt) is caused by fear of losing money and typically occurs in a downward-trending market, with panic and fear as the common themes in relation to the asset price declining significantly. Traders who succumb to FUD often make panic-based trading decisions (sell off their positions), likely at the very bottom of that market.

The two sides of this phenomenon are dichotomous and produce very different types of results. During an upward trend, traders tend to buy (FOMO) at the peak; while in a downward trend, traders tend to sell (FUD) at or near the bottom of that market.

The market can be affected by these two forces creating significant levels of price volatility and sometimes completely changing the market's direction.

Indicators and Remediation Tools:

The emotional basis of the impulse is derived from different emotions. Traders will typically use one of two types of indicators to combat FOMO and FUD.

The FOMO indicator is identified by the Fear & Greed Index, when the Index is above 75, indicating a FOMO situation.
The FUD indicator is identified by the Fear & Greed Index, when the Index is below 25, indicating a FUD situation.

To combat FOMO traders can use specific tools. To combat FUD, traders can also use the tools mentioned above.

User Experiences/Reactions

"I was a victim of Telegram hype and bought most things blindly; in six months' time, I lost about 40 percent of my capital. Now, using ASCN.AI to decide based on factual data, my portfolio has grown 27 percent in four months." — Trader with two years of experience.

"In spring of 2024, I was going to sell during a drawdown, but due to the ASCN.AI report and on-chain data I held, the market eventually supported me." — Long-term investor.

"I used to make spontaneous trades and suffered many losses; I now maintain a journal and give myself 24 hours to decide prior to every trading action. It has helped greatly!" — Crypto newbie.

Important note: ASCN.AI does not guarantee profits, but instead provides an unbiased platform to assist traders with factual data.