What is a mania? It is defined as a mental illness characterized by great arousal, euphoria, delirium, and hyperactivity. When it comes to investing, this translates into investment decisions being driven by fear and greed without being tempered by analysis, reason, or the balance of risk and reward results. Mania tends to run in parallel with the development of the product business, but time can sometimes go wrong.
The technology.com 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. The idea is not yet known to many people, but the profit 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 about “how can the Internet replace such a familiar and ingrained system?” The backbone of the idea begins to build. This translated into the modems, servers, software, and websites needed to turn the idea into something tangible. Investments in the ideas stage start with little brilliance and are made by “known” people. In this 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 crypto code replace our monetary system, contract system, and payment systems?
The first websites were raw, limited, slow and annoying. Skeptics would look at the words “information highway” that visionaries were blabbering on and say “how can this really be so useful?” The element forgotten here is that ideas start at the worst moment and then evolve into something better and better. This sometimes goes through 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 coming in, but there is still no euphoria and astronomical returns. In some cases, investments have yielded decent returns, but not enough to incite the masses to jump. This is analogous to the slow internet connections of the 1990s, crashing internet sites or incorrect information in search engines. In the world of cryptocurrencies, the high mining costs of coins, slow transaction times and piracy or account theft are observed.
Word is beginning to spread that this Internet and “.com” are the news. Products and tangibility are being built, but because of the massive scale involved, the cost and time spent would be massive before everyone uses it. The investment aspect of the equation begins to advance the development of the business, as markets discount the potential of a business with the price of the 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 is getting the space.
This stage is dominated by parabolic yields and the potential offered by the internet. Not much thought is given to implementation or problems because “the returns are huge and I don’t want to get lost in them.” The words “irrational exuberance” and “mania” are becoming commonplace as people buy out of pure greed. Downside risks and negativity and largely ignored. Symptoms of mania include: any havent.com company in its name is in the red, the analysis is thrown out the window in favor of optics, knowledge of the investment is becoming less and less evident among new entrants, the expectations of returns of 10 or 100 baggers are common and few people know how the product works or does not work. This has occurred in the world of cryptocurrencies with stellar returns in late 2017 and incidents of the company’s shares arose hundreds of percentage points using “blockchain” in its name. There are also “reverse takeover offers” where fictitious companies that are listed on a stock exchange but are inactive have their names changed to something involving blockchain and suddenly the shares are actively listed.
Shock and burning
The business scenario for the new product is changing, but not as fast as the investment scenario is changing. Finally, a change of mentality appears and a big wind begins. Volatility is massive, and many “weak hands” are wiped out of the market. Suddenly, the analysis is used again to justify that these companies have no value or are “overvalued”. Fear spreads and prices accelerate downward. Companies that have no profits and that survive with exaggeration and future prospects are blown up. Incidents of fraud and scams that increase to take advantage of greed are exposed, causing more fear and sale of securities. Companies that have the money are quietly investing in the new product, but the pace of progress is slowing 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 loan schemes that use cryptocurrencies and the highest 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 is becoming tangible and for the companies that use it, it’s 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 superhighway” is real. The average user notices an improvement in the product and begins a massive adoption. Companies that had a real profit strategy get hit once during the crash and burn stage, but if they have the cash to survive, they move on to the next wave. This has not yet happened 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 they will be.
The Next Wave: The business is catching up
At this stage, the new product is the standard and the benefits become 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 mania in the early stages. The next stage was characterized by social media companies, search engines and online shopping, which are all derived from the original product: Internet.
Manias work with a pattern that develops similarly over time. Once the stages and thought process of each are recognized, it is easier to understand what is going on and the investment decisions become clearer.