What's to come:

• What's FOMO and how does it work

• How are speculative bubbles created

• What we can do to protect ourselves

The Fear Of Missing Out (FOMO) is a term we've all heard of before but really how dangerous is this psychological phenomena and how can we protect ourselves from it?

Meme coins are the perfect environment to investigative and deepen our understanding of how FOMO works, not only on an individual level but how collectively we see it result in unpredictable price rally's with tokens shooting to the moon in minutes.

"FOMO refers to a pervasive anxiety caused by the perception of missing out on rewarding opportunities"

Lacking utility and real world economic value means meme coins are left to derive much of their perceived (aka speculated) value from pure vibes.

Social media plays a key factor in influencing mass behaviour with often rapid, sensational news on X (previously Twitter) laying the foundation to a token's success.

As mass 'trader' behaviour is very much influenced by round-the-clock social media trends, the consequences result in intense periods of extreme price movements while the average retail investor watches their 1 second charts explode.

This is where FOMO comes in. As price rapidly rises, the fear of missing out (alongside other factors) intensifies and traders impulsively give in to their emotions and buy, creating a speculative bubble that's destined to pop.

According to a study by Jaroslaw Klepacki that looked into "The FOMO effect in cryptocurrency trading" he concluded that "small individual investors (70-80% of all investors [that] have portfolios worth up to USD 10,000)" and "new investors" are most susceptible to their emotions when trading and "lead" in these periods of intensified FOMO.

In other words, 'fall victim' to the speculative bubble (considering they don't exit before it's too late).

A 'speculative bubble' is when an asset's price exceeds its fundamental value due to speculative demand leading to inflated prices, massive sell-offs and ultimately a crash.

This graph represents the 5 stages of a bubble and ironically also sums up the lifecycle of (almost all) meme coins.

What distinguishes a retail investor (a novice trader) from one that's profitable (not to say all retail investors aren't) is the stage of 'profit-taking' where experienced traders leverage the continued buying pressure during the 'boom' and 'euphoria' periods to later sell and take profit.

'Profit-taking' then continues as long as buying pressure (mostly from retail investors) remains and when it ends, the bubble enters its final stage of 'panic'. In other words the crash.

Every bubble needs its victims and in meme coins it's often retail investors.

Let's go more in-depth into who a retail investor is, their attributes and how they're exploited in the markets of meme coins so we can avoid becoming someone else's exit liquidity.

A retail investor in the context of crypto is a new, non-experienced trader who often trades crypto in small amounts for personal gain.

• The retail investor is easily affected by sentiment.

Meaning they're more susceptible to external influences such as social media and as a result are less likely to develop an independent analytical framework or trading strategy outside of whatever's trending on CT (crypto twitter).

By relying solely on the opinions of others and social trends as financial advice or as your 'strategy', retail investors end up taking uneducated trades backed solely by sentiment falling victim to psychological biases such as FOMO or the 'herd mentality' as a result.

• The retail investor is emotionally vulnerable

Especially when it comes to meme coins, impulsive decisions feel necessary as markets explode in seconds, though without the appropriate emotional intelligence it's easy to unconsciously let your feelings place your trades for you.

• The retail investor has no strategy.

Without a sufficient trading strategy you risk falling prey to emotional decision-making and erratic trading behaviour with no predetermined rules or analysis to keep your risk exposure limited.

You'd find yourself with inconsistent results, significant losses and ultimately an unsustainable trading system.

So how can we protect ourselves from FOMO while trading?

By understanding how psychological factors such as FOMO influence our decisions, consciously or unconsciously, we can then reverse-engineer the emotions we may feel to make sure we take rational, analytical and intentional trades instead.

Here are some practical things we can do to counteract FOMO:

• Identify & acknowledge when you may be influenced by FOMO.

• Understand where these emotions come from and manage the triggers (e.g. glamourised screenshots of positive PnL's).

• Take your time & avoid impulsive trading.

• Implement a trading strategy that reflects analytical & rational decion-making.

After all, trading is a journey that's intertwined with subjective experiences and our unique personalities so what works for you might not work for someone else.

Trading is multi-faceted with many psychological phenomena's at play though by exploring and understanding biases like FOMO the next time we meet the charts we'll be that little bit more equipped to take those bags home.

The markets will always tempt you but FOMO only wins if you let it.