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Bitcoin’s Recent Rise Contributed to Investor FOMO
Photographer, Basak Gurbuz Derman | Instant | Getty Images
When it comes to investor illnesses, fear of missing something, or FOMO, is the clinical term for buying a stock after a meteoric price rise because you don’t want to be left behind. There is no known cure for this disease, which has been linked to many bad investment decisions.
Bitcoin caught the attention of investors in 2020 because the price rose from $7,194 per coin to a high of $60,360 in November 2021. Just as we became familiar with digital gold, the price dropped until to $16,547 at the end of 2022.
The current environment is once again a feeling of déjà vu, a frenzy for quick profits that few of us want to miss out on.
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Last week, Bitcoin reached a record $73,679, a price increase of almost 70% since the start of the year. Since then, prices have eased somewhat: as of Wednesday morning, the flagship currency was trading at around $62,500, in part due to Tuesday’s announcement that Japan interest rates increased for the first time in 17 years.
The value proposition of bitcoin is that it serves as a store of value as there will only be a maximum of 21 million bitcoins available. When you buy bitcoin, you are exchanging something in abundance, namely a dollar, for something scarce, which in this case is bitcoin.
When the Fed increased liquidity in 2020, the case for bitcoin was clear. Likewise, once the Fed reversed course and raised rates in 2022, the opposite dynamic occurred.
In other words, the price of Bitcoin will be strongly influenced and correlated with the global money supply.
You can argue that the Fed reduced the rate of tightening, which, based on the rate of change, increased liquidity. Additionally, the banking crisis forced the Fed to first open the discount window and then create a bank term financing program that allowed regional banks to pledge illiquid bonds as collateral in exchange for much-needed cash. These events were tailor-made for the scarcity trade.
There are several things to consider when deciding if it is too late to buy Bitcoin.
First, what do investors think will happen to liquidity? In other words, will the Fed accelerate its monetary tightening campaign?
Inflation may be persistent, but it’s not high enough to warrant a rate hike. On the contrary, investors expect rates to fall. There’s also the issue of commercial real estate loans maturing this year and concerns about regional banks that could force the Fed to provide resources to mitigate a contagion.
Second, Bitcoin was approved as a spot ETF. If Bitcoin is indeed a hoax, it must have quite a selling point, as stalwarts such as Schwab, Fidelity, Van Eck and Blackrock are all in on it, despite the SEC.
In fact, Grayscale’s 2021 Bitcoin Investing Survey found that 77% of investors who didn’t own Bitcoin would be more likely to buy it if there was an ETF, and according to a recent Coinbase report: 59% of institutional investors plan to increase allocations to crypto over the next three years. Lo and behold, Bitcoin ETFs have attracted over $3.5 billion in new influxes in March at the time of writing, supply and demand dynamics pushed the price higher.
Although Bitcoin should be handled with care, investors should use the same investment principles applied to other positions. If a stock is significantly more volatile than the market, it makes sense to hold a smaller position.
It is advisable to average 1% at a time until you reach the position size that fits your risk tolerance. Once you’re fully invested, be sure to rebalance each quarter to smooth out the roller coaster ride and ensure you participate in the upside.
The goal is to incorporate a repeatable process, so you have less fear and avoid missing out. Fortunately, the same investment methods you use for a traditional wallet also apply to Bitcoin.
— By Ivory Johnson, certified financial planner and founder of Delancey Wealth Management in Washington, DC. He is a member of the CNBC Financial Advisor Council.