The Psychological Impact of FUD and FOMO in Bitcoin Mining
June 28, 2021 - Expert Commentary
Cryptocurrency is a fascinating network.
Activity in one section can cause a ripple effect. It is just like the global economy, which is incredibly interconnected.
That said, some animals are more equal than others.
Simple traders and large-scale miners are both stakeholders in the Bitcoin network. Anyone who has been in crypto circles for some time will note that one has a significantly higher seat at the proverbial table.
Miners are what hold the Bitcoin network together. Yes, traders create the demand that the asset needs to maintain value. Without a doubt, everyone has importance.
Cryptocurrency miners, however, collectively secure the network and are literally the custodians of the network. They get first-mover’s advantage on new Bitcoin because they get block rewards and transaction fees.
The Psychology of Bitcoin Prices
Bitcoin prices are totally reliant on supply and demand forces.
There is no centralized entity that can turn on the printers to flood the market with Bitcoin and vice versa. Instead, it is a self-executing supply system that has reduced the number of Bitcoins entering circulation every four years.
At the moment, block rewards are 6.25 BTC—this is in addition to extra fees from transaction fees.
So, it is all down to how Bitcoin holders behave. When the asset is hot, more people hold on to it, increasing its store-of-value aesthetic. When there is panic in the market, many sell their coin, resulting in a corresponding price decline.
Therefore, Bitcoin prices have a lot to do with perception. It is the people’s asset, and its prices go higher as market demand rises. That should be the essence of a store-of-value asset. Its fixed total supply has allowed it to have the perception of scarcity that makes it valuable.
Unfortunately, modern fiat is arbitrary without the backing of hard assets like gold. Governments have constantly printed their way out of various crises resulting in fiat currencies exhibiting consistent inflation rise over the decades.
Therefore, market perception plays a massive role for Bitcoin holders. The largest holders in this category are miners.
Bitcoin miners get new Bitcoin, and then decide whether to sell it to the wider market. Some of the factors that determine whether they will sell include:
- Prevailing Bitcoin prices.
- Sentiment on Bitcoin prices in the near and long term.
- The mining difficulty and cost of mining one Bitcoin.
The latter is a vital metric. Miners often have a specific cost of producing one Bitcoin. The lower their costs, the higher the rewards from mining one Bitcoin.
That said, the first two are the most vital. They go into the psychology of Bitcoin miners the most. When prices are high, they make a lot of profit from selling mined Bitcoin. Similarly, when they think prices will go higher soon, they will likely hold onto their coin for a bit longer.
Fear of Missing Out (FOMO)
FOMO is a genuine phenomenon in cryptocurrency.
Bitcoin prices occasionally go on wild swings that are hard to pin down to one thing. Analysts have concluded that it is the herd behavior of Bitcoin holders in one direction.
The proper characterization for this behavior is FOMO.
Bitcoin HODLers may think that prices will fall soon and sell enmass. This behavior causes a market crash. On the other hand, they may continue buying after a mini-rally and create an artificial market bump.
The biggest HODLers, as aforementioned, are miners. During a FOMO cycle, these titans, some of whom mine a significant amount of Bitcoin, sell or maintain their coin, disproportionately affecting prices.
The fear of missing out is impossible to control. Fiat currencies have Central Banks that make tweaks like varying interest rates to manage market sentiment. For Bitcoin, such control does not exist because it would undermine the basic premise of Bitcoin: decentralization.
Instead, the herd behavior of Bitcoin HODLers is of significant consequence. There are few people that hold Bitcoin for genuine ideological belief. However, it is fair to claim that the majority do it for speculative ends and want to hold onto an asset with better future prospects.
Therefore, holding onto Bitcoin becomes a practical consideration. The essence of such calculations is to try and anticipate what the market will do. FOMO is undeniable and goes a long way in fuelling crypto rallies. Notably, the general Bitcoin price appreciation has been positive over the past decade despite all this upheaval.
The Influence of Elon Musk in H1 2021
It would be nice to believe that FOMO is a purely organic phenomenon.
However, the reality is that Bitcoin ownership has morphed into a pop culture phenomenon. In that regard, there is arguably no person more influential to crypto sentiment than Elon Musk.
The Tesla centi-billionaire single-handedly caused the price of Dogecoin to rally massively in recent months.
Crypto enthusiasts hold him in high regard because other super-wealthy billionaires like Bill Gates and Warren Buffet have been dismissive of Bitcoin.
This unwritten alliance got a systemic shock in April when Musk announced that Tesla would stop accepting Bitcoin payments over emission concerns from the mining process. Many were reasonably dismayed because the same person had been flirting with Bitcoin for months. Surely, he had to have known this from the beginning.
Elon has even suggested the creation of a Bitcoin mining council.
On June 4, Musk tweeted a Bitcoin logo and a broken-heart emoji. Bitcoin prices soon went down about 1.6 percent.
For the record, it is difficult to attribute the decline to his activity entirely. However, from the number of mentions his online activity gains to how closely crypto enthusiasts track what Tesla will do, there is no denying his larger-than-life influence on crypto.
In the future, the market may come to become immune to his eccentricities. For now, though, there is no denying his presence.
HODLing among Bitcoin Miners
FOMO among miners is of huge consequence.
Most Bitcoin miners have steep power costs and considerable investment and maintenance costs. They usually have an incentive to sell as much Bitcoin as they can when prices are highest. It makes economic sense to do so.
In the past year, a different class of miners emerged. Institutional miners, who have managed to mine Bitcoin cheaply, don’t have to sell as fast. In other words, they are not as susceptible to FOMO as before.
Energy costs are a significant consideration. Mining using electricity from the regular grid leaves little margin for error. Any costs saved in sourcing electricity increases profits from the mining operation.
Therefore, miners are looking at cheap solutions for power and more mining at scale. In the past few months, the uproar over Bitcoin energy efficiency has prompted more miners to consider cheap renewable power.
VBit Mining Provides Hosted Mining Using Cheap Renewable Power
The key for prospective miners is to manage electricity costs.
This way, they can plan their Bitcoin sale activities rather than always selling out of necessity.
VBit Mining recognized this need in the market and set up Bitcoin mining data centers in cool areas of North America.
Accordingly, these data centers use cheap renewable electricity and benefit from natural cooling. Miners can purchase equipment from us, sourced from the best ASIC rig manufacturer in the world: Bitmain.
The essence of mining is to do it in a viable yet sustainable setup. VBit operates by these ideals.
Visit VBit Mining Shop today to learn more about Bitcoin mining!