Avoiding FOMO and FUD
Since the introduction of bitcoin in 2009, bitcoin markets and digital currencies have fluctuated widely, even in the larger trends known as the bull and bear markets. Although any market downturn has always been accompanied by significant improvement and growth, downturns can be stressful and difficult for traders.
Here are five strategies you may want to follow during a market downturn to maintain the value of your portfolio, avoid emotional trading, and lose less sleep.
1st – Do not be hunted by FOMO and FUD
It is important to be aware of the latest digital currency news, but too much information can be a bad thing, especially in times of market downturn, where it is very difficult to overcome your instincts and trade on time.
- FOMO (fear of loss) and FUD (fear, uncertainty and doubt) are common terms in cryptography and have a strong influence on our choices in buying and selling.
- FUD generally refers to the negative sentiment of the market that results from some rumors and unfavorable news articles. This can have a negative effect on prices as traders sell their assets in anticipation of further price reductions. FOMO, on the other hand, is about a trader’s tendency to drown in delusions after seeing positive action or price news, so that sometimes the trader rushes into the sea of trades, ignoring the underlying signals.
Remember: no one can predict the future, and there is no better advice than to research yourself and come to a conclusion. In some cases, influencers and publishers can actually have particular interest in creating FUDs or FOMOs to manipulate markets in a certain direction. When it comes to the latest updates in the digital currency markets, always try to verify your information with several different sources.
2nd – Set your goals clearly, diversify, and only trade within your means
No matter how much you trust a particular asset, you should never lose too much. The last thing anyone wants is to fall into the illusion of waiting for positive price action as the price of their portfolio slowly drops.
- Most savvy investors also choose to hold a number of different kinds of assets long-term to diversify their portfolio — from alternate cryptocurrencies to stock market.
- It’s often said that crypto doesn’t sleep. Cryptocurrency markets are well known for their volatility and to counter this, crypto investors should predefine their trading strategies, and if possible, their entry and exit points.
- Even if you had access to every bit of information available, a sudden black swan event, hack, or tweet from a high-profile individual could cause prices to plummet. This is why it’s crucial to plan ahead and to take steps to mitigate your losses should some kind of sudden crash occur.
- Investors could consider fixed strategies like dollar-cost averaging (the process of buying or selling small amounts over regular intervals), which could help a crypto buyer completely avoid trading with their emotions.
Remember: It is very easy to be deceived when keeping volatile assets such as cryptocurrencies. Trading can be a very risky activity, especially in a bear market. Investors need to set goals that minimize potential losses and maximize potential gains.
3rd – Holding and long-term thinking
The phrase “as long as there is no loss” is somewhat true, but it requires great care. If the value of your assets has gone down since you bought them — called unrealized losses — they are only realized once they’re sold for less than your purchase price.
- Over the years, bitcoin has been steadily rising. Even if prices are falling due to a temporary correction in a market or a downturn, history shows that prices are likely to eventually recover due to economic stimuli such as shortages. Many people believe that this limited access will cause the price of digital currencies such as bitcoin to continue to rise over time. If your investment period is long (years instead of weeks or months), negative price movements can be considered temporary.
- Holding for long periods has to date been a proven strategy, with Bitcoin emerging as perhaps the most successful major asset of the last decade.
Remember: In many countries, holding cryptocurrencies for longer periods of time can also be beneficial in terms of taxation. For example, holding for one year or longer may be more favorable than selling in the short-term.
4th – Be ready to ride out the dip or take profits
One of the safest options for avoiding crypto volatility and protecting yourself during a market dip is to convert some of your volatile crypto holdings for more stable assets. This can help an investor ‘lock-in’ their balance and reduce their risk and need to actively manage their portfolio and stress levels in a cryptocurrency bull market.
- Stablecoins (Stablecoins bridge the worlds of cryptocurrency and everyday fiat currency because their prices are pegged to a reserve asset like the U.S. dollar or gold.) like USDC aim to maintain their value at a fixed price — and by converting part of your portfolio into stable-value assets, you lower your exposure to price changes while the markets are in a lull.
- But also remember that selling everything at once, called capitulation, can easily cause crypto holders to lose out if the market suddenly rebounds. This is why it is so important to map out an idea of what level of profit and loss you would be comfortable with before you’re forced to make decisions under pressure.
Remember: Many investors today choose to move in and out of stable assets as part of a larger withdrawal and buy-back strategy, which can help gradually grow their portfolios if the timing is right. This isn’t easy though, and even the most experienced investors often fail to time their entries and exits correctly. (Again, for many investors, dollar-cost averaging can be a good way to avoid even attempting to time the market.)
5th – See the opportunities
Even when the crypto markets are falling, there are opportunities if you know where to look. Where others see a dark and cold crypto winter, keen investors see a new window of opportunity to get their favorite assets at a discount and turn a profit.
- “Buying the dip” is a popular way for traders who felt priced out of previous gains to get into the market or increase their positions.
- Even within a downtrend, there will still be small peaks and valleys as the market fluctuates. Traders that have brushed up on their technical analysis skills can stand to benefit here, using that knowledge to predict these short-term movements and capitalize on them by buying the short-term lows and selling the highs.
- Short selling, or betting that an asset’s value will fall, can also be a good strategy to turn a profit during dips.
- Activities like staking (staking is a way of earning rewards for holding certain cryptocurrencies) and DeFi (decentralized finance) yield farming can further help level out returns and provide support to make sure your actual crypto balance is always growing, even in a bear market or downtrend.
- If you believe an asset will eventually be worth more, dollar-cost averaging works whether markets are up or down! In fact, you get more crypto for your dollar during down cycles.
Remember: These kinds of activities (with the likely exception of DCA) are not for the faint of heart, and may actually result in significant losses — or at the very least greatly increase the amount of time you spend in front of a screen watching stressful price charts.