A friend of mine (a real one; this is not me) has made a life-changing amount of money from Bitcoin this year. This success has left the rest of our circle grappling with a mix of admiration, envy, and self-doubt.
Above all, we admire his timing and his conviction in backing his bet. The post-Trump surge in Bitcoin’s price to nearly $100,000 (£79,000) has significantly transformed his finances. He has wisely withdrawn his initial stake, meaning he’s now playing with house money.
Yet, envy lingers. Our group has found ourselves wrestling with “FOMO” – the fear of missing out. It’s a dangerous emotional trap for investors, leading to poorly timed and ill-conceived decisions. As James Goldsmith famously remarked, “When you see a bandwagon, it’s too late.”
The Psychological Minefield of FOMO
Investors often fall prey to regret, imagining “what might have been.” Psychologists term this “counter-factual thinking.” This regret intensifies when a missed opportunity results from a conscious decision, as opposed to mere ignorance.
Jim Slater’s words often come to mind: “The difference is I did it.” My friend and I debated Bitcoin when its price fell below $20,000. However, I couldn’t shake my belief that cryptocurrencies lack intrinsic value, relying solely on the Greater Fool Theory.
Another pitfall is wishful thinking. As Morgan Housel explains in The Psychology of Money, we often overestimate the likelihood of what we want to be true. During the dotcom bubble, this led to irrational justifications about “eyeballs and clicks.” Similarly, Bitcoin’s advocates rationalize its surging value with theories about “halving” and adoption curves.
Then comes herding – the “madness of crowds.” As John Templeton observed, speculative fads lure investors like moths to flames. Jason Zweig, in his book Your Money and Your Brain, recounts Alfred Sloan’s wise approach at a General Motors board meeting: “Gentlemen, I propose we postpone further discussion until our next meeting to develop disagreement and better understand the decision.”
Avoiding the Traps of Speculative Bubbles
One common psychological bias is anchoring – attaching undue importance to arbitrary numbers. Bitcoin’s recent peak at $100,000 may tempt investors to see $75,000 as a bargain. However, history has shown that assets can fall further, regardless of their previous highs.
James Montier, in Behavioural Investing, warns of “bubble echoes,” where investors reinflate a bubble out of overconfidence. They believe they can escape the crash in time, even when they know the bubble lacks fundamental value.
To sidestep these traps, investors must engage their rational minds. This can be achieved by using words to counter emotional imagery, tracking one’s feelings through an investment diary, and steering clear of groupthink. As Zweig advises, enthusiasm can be a cue to sell, while despair may signal a buying opportunity.
FOMO is a potent force, but with disciplined thinking and self-awareness, investors can resist its pull.
