The Story of Bitcoin: How Greed and FOMO Has Taken Over the Market

Ishan Pandey

If you had invested just $1 into bitcoin in the early 2010s, you would have ended up with almost $150,000 today. While this data is correct, it overshadows the volatility bitcoin has gone through in its mere 13 years of existence. During these 13 years, bitcoin has seen massive fluctuations in its price. The most recent and the most spectacular crash was in December of 2017 when 1 BTC peaked at $20,000. After that, it crashed to a low of around $3,300 in December 2018. That is about an 85% decline in its value. If you had invested $100,000 into Bitcoin at its peak, you would end up with around $15,000. This meteoric rise and fall are not unique to Bitcoin. It happens a lot in the stock market and other asset classes. So what causes this and why will you most likely lose money if you invest this way?

How many of you have heard stories of people being millionaires or even multi-millionaires investing in Bitcoin or any other crypto in those early days? That their initial $500 investment turned into $1m or some crazy amount. A lot, right? Everywhere on the internet, you see people telling you it's the future and if you don’t get in now, it's going to be too late. You get that urge to jump right in and get those juicy profits in the future. And why wouldn’t you? People seem to be making thousands of dollars within days. This phenomenon is called Fear Of Missing out (FOMO) in the investment world.

Let’s explore why this way of thinking is fundamentally flawed. For FOMO to reach this euphoric level, the underlying asset or the asset group must have some genuine potential in the first place. In the dot com bubble, it was the internet and how it could transform our lives. In the case of bitcoin, there are factors like its limited supply and the appeal as a decentralized currency. Whatever the asset, the story always goes something like this. Initially, some people start realizing the potential an asset holds and start buying it. Slowly the momentum builds up and more and more people start buying it, raising its price further. This is the point where FOMO slowly kicks in. People without the slightest idea of what the asset is, start jumping in because they saw someone else make a lot of money from it. If the euphoria is in its initial phase, these people even make some decent money and the word spreads, causing an upward spiral.

This is where FOMO reaches its peak and everyone around you seems to be making money easily. This is when you start seeing stories of how people made millions from the asset and how easy it was. See how its price starts going up because more and more people get in fueling demand? Things look good and it looks like the asset can never go down in price. Everyone around you reinforces this belief with their theories and no price seems to be too high for it. But there is a problem. There are only a limited number of people. So, logically there has to be a peak at some point. By definition, the peak is the point where most people buy the asset and it can only go down from there since fewer and fewer people want it anymore. So, statistically speaking, you are most likely to get in at the peak and lose a lot of money. If you are late to the party and everyone around you seems to be talking about that thing, it is probably the worst time to get in.

The same FOMO can be linked to another investment trap most investors fall for. As I said earlier, BTC has been very volatile since the start. People have lost their life savings in it. But how many of you have heard stories of people losing it all? Even if you have, is it as many as those who have made money in it? Probably not. When people see others getting rich from BTC and the news is flooded with good news and some bullish analysis, people make their decisions based on these factors. So what is wrong with this way of thinking? Imagine two scenarios. One person invested $100 into BTC and ended up making almost a million
dollars. Another person invested $100k during its 2017 peak and ended up with 15k. Who is more likely to come out and talk about BTC? The person who made a million dollars, right? So if you only see the person who makes a million dollars, your decision is biased since you have only seen the good side. But statistics tell us that more people have lost money in BTC than those who have made it in.

The analysis in the previous paragraph provides an intuitive sense of why. This phenomenon is called Survivorship Bias. It is a situation where you base your decisions looking only at those who survived and not considering those who did not. In
this case, looking at those who made massive fortunes in crypto but forgetting about the majority that lost a lot of money.
The purpose of this article was not to analyze whether Bitcoin or other cryptocurrencies are good investments. It was merely to explore why most people will lose money during a euphoric market regardless of how good or bad the underlying asset is. After the dot com bubble, the NASDAQ index lost almost 80% of its value.

Even great companies like Amazon lost more than 90% of their value. It didn’t matter whether the companies were good or not. If only you understood the company and believed in its future, you wouldn’t sell Amazon regardless of how much it dropped in price. The same is true for BTC. The people who invested initially and understood the potential did not sell when BTC rose to $17k. Neither did they sell when it crashed down $3k. Why? Because they understand what they own and believe in bitcoin's future. The best way to avoid FOMO, fear, greed, and other emotions is to invest in what you understand and know how much it's worth.

Article by Ishan Pandey