What is mania? It is defined as a mental illness characterized by extreme excitement, euphoria, delusions, and hyperactivity. When investing, it becomes investment decisions driven by fear and greed, without the restraint of analysis, reason or balance of risk and reward consequences. The craze usually runs parallel to the business development of the product, but the timing can sometimes be skewed.
The Technology.com boom of the late 90s and today’s cryptocurrency boom are two examples of how mania operates in real time. This article will highlight these two events at each stage.
The first phase of mania begins with a big idea. This idea is still unknown to many, but the earning potential is huge. This is usually translated as unlimited profits, because “nothing like this has ever happened before.” The Internet was one such case. People who used the paper systems of the time asked, “How can the Internet replace such a familiar and entrenched system?” as they were suspicious. The backbone of the idea begins to form. This translated into the modems, servers, software and websites needed to turn an idea into something tangible. Idea stage investments start poorly and are made by people who “know”. In this case, it can be the visionaries and the people working on the project.
The same question is being asked in the cryptocurrency world: How can a piece of cryptocode replace our monetary system, our contract system, and our payment systems?
The first websites were crude, limited, slow and annoying. Skeptics look at the “information superhighway” talk of visionaries and ask, “Can it really be that useful?” The forgotten element here is that ideas start at worst, then evolve into something better and better. This is sometimes due to better technology, greater scale and lower costs, better applications for the product in question, or greater familiarity with the product combined with great marketing. On the investment side, early adopters are coming in, but there is no euphoria and astronomical returns yet. In some cases, the investments have yielded decent returns, but not enough to make the masses jump. It’s like the slow internet connections of the 1990s, websites crashing, or search engines having incorrect information. In the cryptocurrency world, this is seen in high mining costs for coins, slow transaction times, and accounts being hacked or stolen.
Word is starting to get out that this is the internet and “.com” is the hot new thing. Products and perceptibility are being built, but because of the massive scale involved, the cost and time would be enormous before anyone could use it. As markets trade off the cost of investment and the potential of the business, the investment aspect of the equation begins to move forward with respect to business development. The euphoria is starting to materialize, but only among the early adopters. This is happening with the explosion of new “altcoins” in the cryptocurrency world and the massive media press the space is getting.
This stage is dominated by the parabolic income and potential that the internet offers. Applications or problems are not given much thought because “the income is huge and I don’t want to miss out”. As people buy out of sheer greed, the words “irrational exuberance” and “mania” become commonplace. Negative risks and negatives and are largely ignored. Symptoms of mania include: Any company with any name is red hot, analysis is thrown out the window in favor of optics, investment knowledge is less and less visible among newcomers, there are 10 or 100 bagger return expectations. common and few people actually know how the product works or doesn’t work. This resulted in stellar returns in the cryptocurrency world in late 2017 and a hundreds of percentage point rise in shares of companies using “blockchain” in their names. There are also “reverse takeover bids,” where listed but dormant shell companies are renamed to something blockchain-related and the shares are suddenly actively traded.
Crash and Burn
The business scene for a new product is changing, but not as quickly as the investment scene is changing. Eventually, a shift in mindset occurs and a massive selling frenzy begins. Volatility is massive and many “weak hands” have been removed from the market. Suddenly, reanalysis is being used to justify that these companies have no value or are “overvalued”. Fear spreads and prices accelerate downward. Companies that are not profitable and survive on hype and future prospects are blown up. An increasing number of frauds and scams are coming to light to take advantage of greed, leading to more fear and selling of securities. Businesses with money quietly invest in a new product, but progress slows because the new product is a “dirty word” unless profits can be convincingly demonstrated. This is starting to happen in the cryptocurrency world with higher incidences of coin thefts and folding lending schemes using cryptocurrencies. Some of the marginal coins lose value due to their speculative nature.
The investment landscape at this stage is littered with losses and bad experiences. Meanwhile, the big idea is starting to catch on, and it’s a boom for businesses that use it. It begins to be applied in daily activities. The product is becoming standard, and visionaries say the “information superhighway” is real. The average user feels that the product has improved and it begins mass adoption. Businesses with a real profit strategy get hit in the crash and burn phase, but if they have the money to survive, they move on to the next wave. This has yet to happen in the cryptocurrency world. The expected survivors are those with a tangible business case and corporate backing – but which companies and coins those will be remains to be seen.
The Next Wave – The business lives up to the hype
At this stage, the new product is standard and the profit is obvious. Business is now built on profit and scale rather than ideas. There appears to be a second wave of investment starting with these survivors and extending into another early stage mania. The next phase is characterized by social media companies, search engines and online shopping, all of which are derivatives of the original product – the internet.
Manias works on a model that plays out in a similar way over time. Once you recognize the stages and the thought process involved in each, it becomes easier to understand what’s going on and make investment decisions clearer.