What is mania? It is defined as a mental illness characterized by great excitement, euphoria, delusions and excessive activity. In investing, this translates into investment decisions driven by fear and greed, without being mitigated by analysis, reason, or a balance between risk and outcome. Mania usually runs in parallel with business product development, but time can sometimes go wrong.
The boom of technology.com in the late ’90s and today’s cryptocurrency boom are two examples of how mania works in real time. These two events will be highlighted with each phase in this article.
The idea phase
The first phase of mania starts with a great idea. The idea is not yet known to many, but the potential for profit is huge. This is usually translated as unlimited earnings, because “something like this has never been done before”. The Internet was one such case. People who used paper systems at the time were skeptical as “how can the internet replace such a well-known and ingrained system?” The backbone of the idea is beginning to be built. This spilled over into the modems, servers, software and websites needed to turn the idea into something tangible. Investments in the idea phase start poorly and are made by people who are “familiar”. In that case, it could be visionaries and people working on the project.
In the world of cryptocurrencies, the same question arises: How can part of the crypto code replace our monetary system, contract system and payment systems?
The first websites were rough, limited, slow and boring. Skeptics would look at the words “information superhighway” spoken by visionaries and say “how can this really be so useful?” The forgotten element here is that ideas start the worst and then evolve into something better and better. This is sometimes due to better technology, higher volume and cheaper costs, better applications for the product in question or better product knowledge combined with excellent marketing. When it comes to investing, early users are getting involved, but there is still no euphoria and astronomical returns. In some cases, investments have given a decent return, but not enough to make the masses jump in. This is analogous to slow internet connections from the 1990s, website crashes or inaccurate information on search engines. In the world of cryptocurrencies, this is evidenced by the high costs of coin mining, slow transaction times and hacking or account theft.
It is starting to be rumored that this internet and “.com” is the most popular new thing. Products and tangibility are constructed, but due to the large volume involved, the cost and time spent would be huge before everyone uses them. The investment aspect of the equation begins to progress in business development as markets discount the potential of the company with the cost of the investment. Euphoria is beginning to materialize, but only among early adopters. This is happening in the world of cryptocurrencies with the explosion of new “altcoins”, and the large media press that space is gaining.
This phase is dominated by parabolic returns and the potential that the internet offers. You don’t think much about implementation or problems because “the returns are huge and I don’t want to miss it.” The words “irrational exuberance” and “mania” are beginning to become commonplace because people buy out of pure greed. Bad risks and negativities are mostly ignored. Symptoms of mania include: Any company that has.com in its name is hot, analysis is thrown out the window in favor of optics, investment knowledge is becoming less visible among new entrants, expectations for 10 or 100 excavator returns are common and few people actually knows how a product works or doesn’t work. This took place in a world of cryptocurrencies with stellar returns in late 2017 and incidents where company stocks rose hundreds of percentage points using “blockchains” in their own name. There are also “reverse takeover bids” where fictitious companies that are listed on the stock exchange but are dormant are renamed to something that includes a blockchain, and stocks are suddenly actively traded.
Crash and Burn
The business scene for a new product is changing, but not nearly as fast as the investment scene. Eventually a change in mindset occurs and big sales begin. Volatility is huge, and many “weak hands” have been wiped out of the market. Suddenly, analysis is being used again to justify that these companies have no value or are “overvalued”. Fear is spreading and prices are falling rapidly. Profit-free companies that survive on hype and future prospects have been blown up. Incidents of fraud and fraud that are increasing in order to exploit greed have been revealed, which causes greater fear and the sale of securities. Businesses that have money are quietly investing in a new product, but the rate of progress is slowing down because a new product is an “ugly word” unless profits prove convincing. This is starting to happen in the world of cryptocurrencies with overlapping lending schemes that use cryptocurrencies and more frequent incidents of coin theft. Some of the marginal coins fall in value due to their speculative nature.
At this stage, the investment landscape is full of stories of losses and bad experiences. In the meantime, a great idea becomes tangible and for companies that use it, it is a boom. It is beginning to be implemented in everyday 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 mass adoption. Companies that had a real profit strategy get hit during the crash and burn phase, but if they have the money to survive, they get to the next wave. This has not yet happened in the world of cryptocurrencies. The expected survivors are those who have a tangible business case and corporate support – but it remains to be seen which companies and coins it will be.
The next wave – The business is gaining popularity
At this stage, the new product is the standard and the profit becomes obvious. The business case is now based on earnings and scope, not ideas. A second wave of investment emerges starting with these survivors and extending to another early stage of mania. The next phase was marked by social networks, search engines and online shopping, all of which are derivatives of the original product – the Internet.
Mania works according to a pattern that is played out in a similar way over time. Once the phases and thought process in each of them are recognized, it becomes easier to understand what is happening and investment decisions become clearer.