FUD is a commonly used expression in the crypto community. It stands for fear, uncertainty and doubt – reflecting sentiment in the market, especially when they’re is a big price shift. This state of mind will often impact how and when crypto enthusiasts make trades, purchases, or hold onto their coins. The act of holding is commonly referred to as HODL – holding on for dear life.
Fear, uncertainty and doubt can arise from a number of circumstances, and in most of them, it will dramatically impact cryptocurrency exchanges. In this guide, we breakdown examples of where FUD comes from and why it impacts the markets in the way it does.
A trader or investor may begin to experience FUD during a period where a digital asset’s price is plummeting. Let’s take Bitcoin as an example. If Bitcoin’s price suddenly starts dropping to below its previous nominal value, altcoins typically follow. This can give way to a bear market and crypto enthusiasts will refrain from making any more purchases. Investors may start to become fearful that their capital is going to be lost, they’ll feel uncertain about where Bitcoin will go to next and, they may even doubt it will ever recover.
If FUD is the majority feeling across investors and traders, they may choose to liquidate their assets – resulting in low liquidity and trading volumes. Cryptocurrency exchanges will be directly impact as trading will slow down.
Scams and vulnerabilities
Another event that may prompt FUD is when scams, hacks, or vulnerabilities within a cryptocurrency exchange come to light. Sometimes, even just a passing rumour about a scam may be enough to inflict some fear, uncertainty and doubt.
Initial Coin Offerings have recent come under a lot of scrutiny. The promotion of upcoming tokens, sometimes accompanied by a celebrity endorsement, encourages investors to raise capital before its launch. However, market research showed that a large majority of these ICOs were a scam resulting in investors losing large amounts of capital as the coin never gets off the ground.
There are also increasing examples of 51% attacks, exchanges being hacked, and huge amounts of capital being lost. With an increasing amount of investors now asking whether centralised cryptocurrency exchanges are safe, FUD begins to rise. This directly impacts the amount of activity carried out, with some investors taking the view that they should take their cryptocurrency off exchanges completely.
Cryptocurrency is still in its infancy and is still largely unregulated. For some enthusiasts, this lack of regulation is central to the success of alternative, digital currencies. Others believe that the need for regulation is increasingly urgent and the current lack of rules fosters fear, uncertainty and doubt across the community.
As cryptocurrency still hasn’t experienced mainstream adoption, different countries are able to take an opposing view on its worth and whether it offers opportunities to them. As a result, levels of FUD vary across the globe and these levels change depending on the relevant government’s stance. Columbia and Ecuador, for example, have banned the use of Bitcoin. FUD becomes a rational response to this regulation as the markets begin to tumble.
Government regulation, whether confirmed or just discussed, will always impact activity on the exchanges as a direct result of causing greater levels of fear, uncertainty and doubt.
While celebrity endorsements have been known to stir up positive activity in the cryptocurrency community, public denouncements from financial leaders can encourage feelings of FUD.
This isn’t just limited to financial figures. FUD can occur even when seasoned traders take an opposing stance to a token online. The world of social media is highly influential and can easily disrupt the market. With open discussions about whether people will HODL, buy or sell, prices and popularity of coins can fluctuate wildly.
FUD isn’t always a bad thing
Market sentiments work in cycles. There will always be high points and low points. Many instances of people withdrawing through FUD is usually because of inexperience in the markets.
Since a lot of people who liquidate their assets when experiencing FUD, it actually creates new opportunity for those who are holding on. If an asset’s price is dropping, and a trader thinks it will recover, they will purchase the assets that are being sold. This is reminiscent of a stock market crash in which traders begin acquiring the stocks at a low price ready for the eventual upturn. Substantial gains can be recorded in doing so but the risk is also a lot higher. This is because those traders will have a lot of assets, and if that token does crash, they’ll be out of pocket.
In an ever volatile market, levels of FUD will change and responses driven by uncertainty are completely understandable. However, building a deeper understanding of the markets, keeping an eye on cryptocurrency exchanges, and paying attention to the latest news will help you to keep those feelings under control.
To find out more about cryptocurrency, how to trade, and how to achieve consistency in a volatile market, read our latest guides.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.