FoMo and greed: two powerful drivers of crypto adoption

Fear of Missing out (FoMo) and greed can prey on the minds and stalk the wallets of  investors as they hear of riches that others claim to have made, whereby encouraging  investors to ‘jump in’. Interestingly, FoMo was a term first used as recently as 2004 to  describe people’s behaviour in reference to social media: “FoMO includes two processes;  firstly, perception of missing out, followed up with a compulsive behaviour to maintain these  social connections”.

Greed, when it comes to investing, has been a key driver among investors for an eternity. As Will Durant, an American historian commented when looking at investors’ behaviour: “Most  of us spend too much time on the last twenty-four hours and too little on the last six  thousand years.” It has been 10 years since the most recent financial crisis, when the stock  market dropped over 55% and it has been 20 years since the Internet Bubble burst, when  the Nasdaq lost a whole 80%. It has also been 45 years since the 1973-74 market crash (and  wealth consuming inflation) and 90 years since the loss of 90% of the stock market’s value  during the Depression. 

Source: Simplilearn 

One of the most successful investors of all times is Warren Buffett, who has asserted: “Be  greedy when others are fearful, and fearful when others are greedy.” Further back in historyanother hugely successful investor was John D. Rockefeller who sold his stocks and shares  just before the 1929 crash after hearing stock tips from his shoeshine boy. He figured that if  an unsophisticated investor was giving tips then the stock market was due for a correction.  This story may or may not be true, but it highlights the fact that when it seems everyone is  talking about how well their investments are doing and exchanging investments tips such as recipes, the market is probably overvalued. 

How many of you reading this today have heard of Shiba Inu? If not, this short Youtube video will help to explain more. Well, no doubt many of you (with the benefit of hindsight)  wish you had copied what one investor did in August 2020 and invested $3,400 as it grew to  be worth a staggering $1.5billion! Just in this last month, Shiba’s price has grown by over  668%, valuing the token at a massive $36billion and making it the 9th most valuable  cryptocurrency. It is this type of performance that has had the chat rooms in places such as  Coinbase, eToro, Binance, etc, buzzing with people professing to be experts predicting the  next bullish or bearish move for Shibu. However, one of the key requirements for regulators  such as the Financial Conduct Authority (FCA) is to protect investors. Whilst Shibu investors  may well have made huge returns, if they did indeed invest last November, the regulators  will also want investors to be aware the token price has also experienced times when it has  fallen too. Last year the price of the Shibu fell by over 81% in May, again in October it fell by  39% and again towards the end of October it fell by 28% from its high. This type of volatility  (zig and zag) in terms of the price of the token and potential loss for some investors could  lead to a serious loss of capital and, in a worst-case scenario, undermine confidence.  Unsurprisingly, the FCA insists that regulated firms always display risk warnings such as,  “The value of investments may fall as well as rise”. Even though most regulators do not  regulate cryptos, namely the FCA, have restricted the ability of people to access cryptocurrencies in their pension funds.

Shibu Inu token performance Nov 2020 to Nov2021 

Source: Coingeko 

In last few weeks, another crypto has caught the attention of some investors, the Squid  token, which is named after Netflix’s much-watched show. The Squid token has risen by  over 45,000% in October 2021, but holders have struggled to be able to sell and now it is  being reported that this may actually be a scam. The stella performance of some cryptos  certainly does seem to have fuelled FoMo, or it could be greed, since there has been a  substantial number of people buying cryptocurrencies globally, especially in countries  where the citizens are predominately young. 

The % of citizens who have bought a cryptocurrency 

Source: Statista 

However, it is not just cryptos which have seen outstanding returns. Many equity markets  have enjoyed massive returns over the last ten years as governments have been printing  money, buying up bonds and crushing interest rates. One way in which institutional  investors assess the value of the stock markets is to use the Shiller Price-to-Earnings ratio – currently at 39 times earnings. This is almost 50% above its long-term average, is second  only to the peak it reached during the dot-com boom, and way, way above the value prior 

to the 1929 crash. It would seem that FoMo and greed have been a driving force in the  equity, bond and crypto markets but eventually all of these assets will readjust before the  next bull market is able to take charge.