The fear of missing out (FOMO) frequently impacts investors’ choices in investing. They may generate some profits if they enter the market at the right moment. However, if momentum turns against them, these FOMO investors may fall prey to sudden price movements. Ultimately, they end up becoming exit liquidity. This means that they buy assets at high prices and then become liquidity for early investors to sell the assets they already have.
As we know, all markets are based on liquidity, i.e the amount of money available in the market. High liquidity means you can sell assets easily without significantly affecting prices. Low liquidity makes selling assets more difficult and even a small sale can result in the price crashing.
FOMO can also be a deliberate act, with whales – those possessing huge amounts of assets – the ones pulling the strings. The whales will not sell their assets when the liquidity is low to avoid price crashes. Therefore, they will work around this by increasing the asset’s liquidity. They do this by creating hype for the assets they want to sell. If successful, the hype can make investors interested in buying their assets due to FOMO.
By having a standby buyer, whales can sell their assets without worrying that the price will drop significantly. However, when the hype wears off, the asset’s price and liquidity will decrease. The whales are unaffected as they sell the assets when the price is high. Meanwhile, new investors who buy at high prices may experience losses. These new investors are known as the exit liquidity for the whales.
Want to avoid FOMO when investing in crypto? Read more in the following article.