What is FUD in financial markets?
FUD is an abbreviation for Fear, Uncertainty, and Doubt. Influential market participants sometimes induce FUD and use it as a marketing tactic to provoke investors to sell their assets. The aim of this tactic here is to buy back the asset in question later at a lower price from those who sell out of fear. They realize their goal through spreading rumors, exaggerating negative narratives, or spreading obscure information designed to create Fear, Uncertainty, and Doubt or intensify an existing FUD in the market. FUD seems to be most prevalent in the crypto market as it is a new and disruptive technology that threatens some traditional businesses, financial institutions, and governments.
Is FUD real?
In some cases, FUD is both real and justifiable, but some take advantage of its existence in the market by exaggerating the negative narrative that led to the fear and uncertainty in the first place. An influential investor may, for example, appear on TV warning of total economic collapse as the crypto market is falling to discover that the same person is buying the discounted price later. It happens time and time again. So an investor should take in what he hears or read in the media with a grain of salt.
What causes FUD in the crypto market?
Many factors lead to the creation of FUD in the crypto market. However, four factors, in particular, seem to create most of it, these are:
- Government regulation or rumors of governments banning crypto
- Prominent members of society who condemn or speak negatively about cryptocurrencies
- The volatile nature of the crypto market, namely sharp decline in prices
- The competitive landscape outside the crypto market
Opportunities created by FUD!
FUD often results in significant price drops, causing many people to sell at a loss. But it also creates opportunities for savvy traders and investors who understand market dynamics. FUD for these individuals can trigger an excellent entry point while everyone else is panic selling or keeping away from the market.
For example, if the FUD lowers the price of Bitcoin by 40%, it could create an incredible buying opportunity. Many investors view major market corrections or crashes due to FUD as a kind of “sale” with a time-limited opportunity to buy at a reduced price. FUD can be lucrative that many professional traders specifically include it in their trading strategies. While it is challenging to accurately time the bottom, Savvy investors use dollar-cost averaging (DCA) and start layering in on major support levels.
All markets go through FUD. Unfortunately, it is more scattered in the crypto market than most other markets. Every time negative news hits the market, many people fear that the entire market will collapse and drop to zero.
The volatile FUD cycles are difficult for the average investor to handle. However, the price surge commonly seen with cryptocurrencies is enough to keep many of them in the game. Many people view the sharp price volatility of cryptocurrencies as inevitable with an emerging and disruptive market like crypto.
Thanks to the endurance and utility of cryptocurrencies, they can exist for hundreds or even thousands of years. After all, legitimate cryptocurrencies are like precious metals, and precious metals have been used as a store of value for thousands of years. If such a change in perception occurs and adoptions continue rising, most FUD will disappear, regardless of who spread it in the market.
However, no market is immune from FUD. It can be helpful for people concerned about it to learn how to use it to their advantage and see it as a buying opportunity rather than a crisis. With that said, investors should learn how to calculate their strategies to capitalize on FUD, which still allows you to buy crypto assets at low prices.