Think of the hustle and bustle of any average Indian vegetable market—customers haggling over prices, vendors shooing flies away, and people navigating their way through heaps of produce. The noise and chaos feel so normal in places like this, yes? Well, especially so in a marketplace where there are millions of participants transacting in multiple assets simultaneously. Throw fear of a crisis into the mix, and the sound levels and confusion only increase. Let’s talk about that: the Fear, Uncertainty, and Doubt (FUD) that users experience, especially in the crypto world.
What causes FUD?
FUD can be caused by various factors. Legitimate concerns about the market, negative news, sensationalist media coverage, and the actions of other market participants (especially whales) can all contribute to the creation of FUD. And in moments of crisis, when emotions are high, FUD can spread like wildfire.
In the crypto market, FUD has much to do with market volatility, company insolvency, high electricity consumption, regulations, and hacks, among other things.
There are some other factors that influence the effect of FUD. In the stock market, the chances of FUD are less. Because they are regulated markets and are open for a few hours on weekdays. The weekend allows the dust to settle for a bit. And it enables investors to approach things with a clear mind, so they can make better-informed decisions. But, in the crypto market, due to its unregulated nature, the risk of FUD is higher. In addition, because the markets stay open 24*7, filtering out the noise to identify legitimate concerns is way harder.
Examples of FUD in the crypto market
One example comes to mind from the hyper-growth phase of 2017. Bitcoin’s price had peaked, almost touching $20K. The news of a ban on mining by China began doing the rounds then. Within a couple of weeks, BTC prices fell to nearly $6K per coin.
In 2022, too, we can find multiple moments of FUD. The first time we saw FUD swooping down on the market was in the context of the Terra Luna crisis in May this year. Terra’s algorithmic stablecoin UST depegged and tumbled to a significant extent. As one investor fell prey to FUD after another, the total crypto market cap shed over $500 billion. BTC prices, too, dropped from close to $40K to the $27K level in a matter of days.
The second major event that resulted in FUD in 2022 involved centralized DeFi lenders Three Arrows Capital and Celsius Network. Sometime after the Terra Luna crash, both the giants found themselves drowning in the waters of bankruptcy. The development left the crypto market rattled. Again, the BTC price tag was stripped of another $10K.
Most recently, the ongoing FTX saga has again triggered a case of FUD. A few days, it came to light that the world’s third-largest crypto exchange, FTX, backed by sister concern Alameda Research, was in for a significant liquidity crunch. The exchange needs up to $8 billion in emergency funding to cover the shortfall and honor users’ withdrawal requests. The high volatility, market losses amounting to over $125 billion in market capitalization, and the widespread FUD is for all to see.
How to manage FUD while investing in crypto
FUD can be frustrating. Especially when it results in large portfolio losses. It can leave you feeling overwhelmed, stressed, or wanting to quit. And it’s hard to ignore FUD once it has entered the room. But some of the following can help you to manage and reduce its impact.
Successful investors never stop learning about the latest trends and developments and reviewing their decisions in market conditions. They know that the key to combatting FUD is information. When your decisions are informed, the chances that you will succumb to FUD are fewer. So don’t rely completely on analysis by others. Do ample research and plan your trades yourself.
Invest in crypto assets you fully understand
The crypto market is a far cry from stock markets. Crypto assets are valued based on their adoption rate and technical capabilities. BTC and ETH, for example, are the most valued assets because of their protocols, which have only become stronger and more decentralized over the years. Such protocols with high adoption and development activities are valued higher than dApps and DeFi platforms.
Use reliable news sources
Due to the unregulated nature of the crypto marketplace, there are no restrictions on the news and investment information being reported. Unlike stock markets, here, pretty much anybody can give investment advice or trading tips. This makes it all the more essential to follow verified news platforms and channels for updates.
What are the long-term effects of FUD in crypto?
FUD hinders our ability to make informed decisions. It pushes people toward losses and leaves the markets shaken.
Large cryptos tend to suffer from price devaluation, making the market even more fearful. FUD can transform into a self-fulfilling prophecy when this happens.
Meanwhile, smaller crypto projects are even worse off on account of FUD. They often fail to attract users even after the market recovers. So much so that the FUD caused by Terra’s crash and the Three Arrows Capital insolvency led to over 12,000 tokens turning into flops.
Is it a good strategy to buy when there’s a lot of FUD?
Widespread FUD always results in extremely volatile market conditions. While many of us hate it when that happens, it can be great for traders looking to profit from a falling market.
That said, always look for clarity about the market and its direction before making investment decisions. In a highly volatile market condition like the current one, waiting and watching is one of the best things to do.
FUD cannot be eliminated. However, as the market grows and gets regulated, instances of FUD are likely to become fewer.
Meanwhile, the only sure-shot way to shield yourself from the impact of FUD is by keeping that learning going. Study market trends and other developments, invest in fundamentally strong assets and keep your hands off risky cryptos that tempt you to chase returns.