The cryptocurrency boom has seen many casual investors jump into Bitcoin in a FOMO frenzy. Investors who had previously never even heard of Bitcoin or cryptocurrencies have dived head-first into the space after hearing about astronomical gains. In this post, we’ll examine how a FOMO strategy has performed historically for Bitcoin.
To simulate the FOMO effect, we’ll consider a hypothetical individual: ‘Fred the FOMO-er’. Fred is a casual investor who behaves like a typical investor new to crypto. Instead of investing for the long-term, Fred only cares about making money quickly and thus, buys in only when things are going well and everyone is hyping the market. Also, since Fred is inexperienced, he dumps his investment quickly- exhibiting the ‘weak hands’ effect.
To model Fred’s behavior, we started with data in mid-2013 (price and Google trends data were pulled using Cryptory), when more mainstream people started to hear about Bitcoin. We then implemented the following rules for Fred:
- Fred will buy into the hype when the price and Google search interest jump 30% over the past week’s average.
- Fred will sell when he gets spooked by observing a 30% drawdown from the post-FOMO high price.
Here are the results of the simulation. Despite the first round of FOMO earning a 73% return, four out of five situations led to a loss.
FOMO Simulation Results
|FOMO #||Date Bought||Buy Price||Date Sold||Sale Price||Return||Cumulative Return|
The loss for December 2017 was especially disastrous.
Another interesting thing to note is that the search interest has been low during the current recovery period. Suggesting that newbies might not be FOMO-ing into the rally and that the uptrend might be sustainable.
As you can see, FOMO, when combined with panic selling is not a particularly good strategy. If you are considering buying into the hype, be prepared to hodl through some deep drawdowns.