How to Navigate the Crypto Bear Market - FOMO and FUD edition
We all would agree that dips are frustrating, if not outright terrifying for some people. After all, the crypto sector is highly volatile as it has gone through multiple cycles of growth and decline since its inception. Over the years, the overall bearish sentiment resulted in steep declines of over 70% in a matter of days, which is stressful for both beginner investors and experienced traders alike.
There is a concept in traditional finance called "Trading Psychology,” which tells us that the key to making money in financial markets is correlated with containing two emotions: fear and greed.
When investors and traders are influenced by fear and greed, they make snap decisions based on their emotions and end up losing a large chunk of their portfolios. It is essential for the investors and traders to hold onto their emotions during the dips and make a solid plan to hedge against the risk.
This article discusses various strategies that will help young investors and traders navigate the market during the dips and avoid making emotional decisions to carefully manage the crypto down cycle.
FOMO and FUD are two of the biggest driving forces in any market, as they influence the market sentiment based on fear and greed. When investors and traders fall prey to FOMO and FUD, they ignore optimal strategies and become emotionally overwhelmed, which causes them to make bad decisions. This is especially true in the event of a market downturn.
FOMO is an acronym for “Fear of Missing Out” and refers to a mental state of fear and anxiety when a person thinks he is missing out on a perfect opportunity, which in reality, is only driven by speculation and false information.
How does all this relate to crypto?
Well, there are numerous no-value coins that are a perfect example. Bad actors launch worthless projects and spend a fortune on marketing campaigns with taglines like “to the moon” and fake promises. New investors and traders jump in, thinking they might miss out on this once-in-a-lifetime opportunity, only to realize later that they got scammed.
FUD refers to “Fear, Uncertainty, and Doubt.” FUD is a marketing manipulation technique where bad actors spread false propaganda, creating a state of fear and uncertainty in the market. Unlike FOMO, FUD is usually spread out by news outlets, large institutions, or influential figures to trigger massive sell-offs.
You might have heard the phrase “Bitcoin is a bubble” from people representing large institutions or influencers like Elon Musk, whose recent tweet on Bitcoin's energy consumption issues crashed the market, even though this issue has been already debunked. These events trigger massive sell-offs, and investors sell their holdings out of fear.
What is the Difference Between FOMO and FUD?
⧫ FOMO, or Fear Of Missing Out, is a term used for the cryptocurrency world that is closely related to our daily lives.
⧫ FOMO typically refers to beginners who are only interested in trading crypto assets because they are curious about the people who appear to be so happy to trade such assets now a day.
⧫ People who experience FOMO have a great desire to mimic what others do. They are afraid of missing out, especially if they believe the price of one of the coins will rise.
⧫ For the first time, FOMO has emerged on social media.
⧫ The term has been added to the Oxford English Dictionary due to its widespread use. Even though both have some similarities in that they can impact emotional factors and cause fear in crypto traders or investors, FUD and FOMO differ slightly.
⧫ FUD is an emotional opinion that can cause traders and investors to doubt or change their minds about their strategic plans for investing in crypto assets. FOMO, on the other hand, refers to people or parties who are affected by someone else's opinion about the market situation of crypto assets or other things related to trading or investment.
⧫ Traders or investors typically experience FOMO when something significant occurs or when a crypto expert expresses an opinion about the market condition.
If you're a beginner investor or a trader, you should do your thorough research before investing in any cryptocurrency or selling your holdings. It is important to realize that FUD and FOMO are temporary, and the market rebounds once things settle down. One of the ways you can avoid FUD and FOMO is by not making snap decisions driven by your negative emotions. If you come across any news, make sure to check the sources and do your own research(DYOR)before making a decision.
1. Diversification is Key
As they say, “don't put all your eggs in one basket.” Diversification is key when it comes to hedge your risk in the hyper-volatile cryptocurrency market. Instead of going all in on one project, you should consider spreading out your investments into different cryptocurrencies (or other non-crypto assets) to lower your risk and maintain a healthy portfolio.
With a good diversification strategy, you can also experiment with the riskier investments to benefit from their risk-return tradeoff. Many new investors and traders make the mistake of putting all their money into much riskier projects that significantly increases their risk exposure.
After performing thorough due diligence and research based on your risk appetite, you should divide your investments among numerous projects. Avoiding “trading signals” from random Telegram groups or Discord channels might also be a good idea because most of them are involved in pump and dump schemes. If you come across a piece of financial advice, do your own research before making an investment decision.
If, however, you like only one crypto project, using DCA (dollar-cost averaging) rather than investing in bulk might be the option for you. Time in the market always beats timing the market.
2. Think Long-Term And HODL
There is a famous statement tossed around the crypto space quite frequently that says “it's not a loss until you sell.” This statement is partially true because you're not realizing any loss as long as you don't sell your holdings. You only realize a loss once you sell your holdings.
If the market goes down, the worst thing to do is to panic and immediately sell off your crypto assets and suffer unrealized losses. Investors should develop a long-term investment mindset and not distract themselves with short-term events. Markets always tend to head towards an equilibrium.
For those planning to invest for the long-term, dollar cost averaging (DCA) is a great strategy, where you buy a small number of crypto assets regularly, regardless of their price, and without overwhelming yourself by looking at the daily price charts. Utilizing trading bots to purchase crypto assets on a regular basis might also be a great idea. That way, you can automate the DCA method and monitor the purchases through your wallet.
3. Crypto Trading Risk Management
The risk of a cryptocurrency losing value due to price volatility is known as crypto risk. Whereas, market risk and exchange rate risk are other terms for crypto risk. The cryptocurrency market is extremely volatile, and there are numerous factors that can influence the value of a cryptocurrency. The most important factor is the cryptocurrency's supply and demand, which influences its price. So, in order to control emotions like FOMO, especially during FUD, you need to have a proper risk management strategy.
Crypto Risk Management is a process of identifying, quantifying, and mitigating risks that may arise in digital asset transactions. Furthermore, risk management can be defined as anticipating and managing potential risks associated with a failed trade. It is the process of identifying, analyzing, and potentially mitigating risks in cryptocurrency trading to keep profits from being significantly reduced.
The primary goal is to minimize losses, and it's no secret that some of the world's most successful traders employ excellent risk management strategies that have propelled them to the top of their respective industries.
Following are the ways to manage your risk during the bear market.
⧫ Do your homework
⧫ Risk/Reward Ratio
⧫ Excessive leverage should be avoided
⧫ Limit your position sizing
⧫ Using appropriate stop-loss
4. Buckle Up to Capture Crypto Crashes
The crypto market has been on a roller coaster and this has some traders feeling nauseous. However, the crashes can offer an opportunity to buy in at the lowest price before the coins bounce back. There are many different coins out there, and some may be in a good position to recover. FOMO and FUD are two of the major reasons for the crypto crash in the market. Therefore, it's all about timing and all you need to do is apply a strategy to capture oversold coins.
When the crypto market crashes, traders can use this strategy to get in on some of the cheapest prices before they bounce back. One of the safest ways to avoid crypto volatility and protect yourself during a market drop is to turn some of your volatile crypto holdings into more stable assets. In a cryptocurrency bull market, this can help an investor "lock in" their balance and reduce their risk and the need to actively manage their portfolio and stress levels.
Check out KuCoin's guide on tips to make money in the bearish crypto market.
Aside from the dips, there are so many research platforms, launchpads, and incubators where you can discover promising crypto projects at an early stage of their development. You can also explore things like staking or yield farming to grow your portfolio passively.
5. Don't Believe Everything on Social Media
Lately, social media engagement is driving FOMO and FUD along with the social media sites such as Facebook, Twitter, and Instagram. People have a tendency to act like everyone else, both at work and in their personal lives.
Since most traders use social media for the latest news, the market volatility is driven by social media usage. So, for instance, if your friend on social media shares on Facebook the news that can drive buying or selling of a certain stock or coin, you will also look to make a similar decision.
If you do make a purchase and re-post your sentiment about a certain coin, it will influence your social media friends on Facebook to take a similar decision. This way, market drives it's sentiment that can be bearish or bullish and in the study of human behavior we call it herding behavior.
Social media usage is common among young adults and the herding behavior among them usually drives fear of missing out. This fear of missing out triggers anxiety and panic mode among young adults, leading them to make a purchase or a sale. So, just don't trust anything shared on social media platforms. Do your own research as it's more fun and you will also feel more confident with your decisions.
Dips and market downturn cycles are not easy to handle for most people. However, anyone can survive these downturns with good strategies, maintaining an emotional balance, and having a long-term investment approach.
If we were to summarize everything, it would be - avoid both FUD and FOMO, diversify your investment portfolio, have a long-term approach, be an opportunist, and buy the dips.
So, are you ready to grow and manage your portfolio by living a FUD-free life?
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