What is a mania? It is defined as a mental illness characterized by great arousal, euphoria, delirium, and hyperactivity. When investing, this translates into investment decisions motivated by fear and greed without tempering them with analysis, reason, or balance of risk and reward results. The craze usually runs parallel to the business development of the product, but the timing can sometimes run the other way around.
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The technological boom of the late 1990s and the current cryptocurrency boom are two examples of how a real-time craze works. These two events will be highlighted with each stage of this article.
The stage of the idea
The first stage of a craze begins with a great idea. A lot of people still don’t know the idea, but the benefit potential is huge. This usually translates into unlimited benefit, as “something like this had never been done before.” The Internet was one such case. People who used the paper systems of the time were skeptical as to “how can the Internet replace such a familiar and ingrained system?” The backbone of the idea is beginning to build. This translates into the modems, servers, software, and websites needed to get the idea to something tangible. Investments in the idea stage start poorly and are made by people “in knowledge”. In the case, they can be the visionaries and the people working on the project.
In the world of cryptocurrencies, the same question arises: how can a piece of cryptographic code replace our monetary system, contract system, and payment systems?
The first websites were rude, limited, slow and annoying. Skeptics would observe the words “information highway” that visionaries were spitting out and saying “how can it really be so useful?” The element forgotten here is that ideas start at worst and then evolve into something better. Sometimes this goes for better technology, more scale and cheaper costs, better applications for the product in question or more familiarity with the product combined with great marketing. In terms of investment, early adopters are getting into it, but there is still no euphoria or astronomical returns. In some cases, investments have yielded decent returns, but not enough to incite the masses to enter. This is similar to the slow internet connections of the 1990s, the failure of websites or the wrong information in search engines. In the world of cryptocurrencies, it is witnessing high mining costs for currencies, slow transaction times and piracy or account theft.
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The news is starting to come out that this Internet and “.com” are the most interesting news. Products and tangibility are being built, but due to the massive scale involved, the cost and time invested would be massive before everyone uses it. The investor aspect of the equation is beginning to advance business development as markets discount a company’s potential with the price of investment. The euphoria begins to materialize, but only among the first adopters. This is happening in the world of cryptocurrencies with the explosion of new “altcoins” and the big media press that space is getting.
This stage is dominated by the parabolic yields and potential that the Internet offers. Not much thought is given to implementation or problems, as “the returns are huge and I don’t want to miss it.” The words “irrational exuberance” and “mania” are starting to become commonplace as people buy because of greed. Negative risks and negativity and largely ignored. Symptoms of mania include: Any company that has.com in its name is hot, the analysis is thrown out the window in favor of optics, the knowledge of the investment becomes less and less evident among the new entrants, the expectations of returns of 10 or 100 packers are common and few people really know how the product works or not. This has occurred in the world of cryptocurrencies with stellar returns in late 2017 and incidents of the company’s shares appearing hundreds of percentage points by using “blockchain” in its name. There are also “reverse takeover bids” in which shell companies that are listed on a stock exchange but are inactive change their name to something involving blockchain and the shares are suddenly actively traded.
The Crash and Burn
The business landscape of the new product is changing, but not as fast as the investment landscape is changing. Finally, a change of mentality appears and a great defeat begins. Volatility is massive and many “weak hands” are wiped out of the market. Suddenly, the analysis is re-used to justify that these companies have no value or are “overvalued”. Fear spreads and prices accelerate downward. Companies that have no income and that survive on advertising and future prospects are exploited. Incidents of fraud and increasing scams to take advantage of greed are exposed, causing more fear and selling stocks. Companies that have the money quietly invest in the new product, but the pace of progress slows because the new product is “an ugly word” unless the profits are convincingly demonstrated. This is starting to happen in the world of cryptocurrencies with the folding of lending systems through cryptocurrencies and major incidents of currency theft. Some of the marginal currencies are falling in value due to their speculative nature.
At this stage, the investment landscape is charred with stories of losses and bad experiences. Meanwhile, the big idea goes into tangibility and for the companies that use it is a boom. It begins to be implemented in day-to-day activities. The product is starting to become the standard and visionaries are quoted as saying that the “information highway” is real. The average user notices an improvement in the product and mass adoption begins. Companies that had a real profit strategy are successful during the burning stage, but if they have money to survive, they get to the next wave. This has not happened so far in the world of cryptocurrencies. Expected survivors are those who have a tangible business case and corporate support, but it remains to be seen what companies and currencies will be.
The next wave: the business puts up the hype
At this stage, the new product is the standard and the benefits are increasingly evident. The business case is now based on profits and scale rather than idea. A second wave of investment appears that begins with these survivors and extends to another initial craze. The next stage was characterized by social media companies, search engines and online shopping, which are derived from the original product: Internet.
Manias work similarly over time. Once the stages and thought process of each are recognized, it becomes easier to understand what is going on and the investment decisions are clearer.