What is mania? It is defined as a mental illness characterized by excitement, euphoria, delusion and overactivity. When investing, investment decisions are driven by fear and greed, without analysis, reason or balance sheeting the results of risks and rewards. The craze usually runs parallel to the development of the product business, but the timing can sometimes be wrong.
The technology.com boom of the late 90s and the cryptocurrency boom of today are two examples of a craze operating in real time. These two events will be highlighted at each stage in this article.
The first stage of a mania starts with a big idea. The idea is not yet known to many people, but it is a great opportunity to make a profit. It is usually translated as unlimited profits, because “nothing like it has ever been done.” The Internet was one such case. People who used the paper systems of the time were skeptical “how can the Internet replace such a well-known and entrenched system?” It begins to build the backbone of the idea. The idea came back to the modems, servers, software and web sites needed to access something tangible. Investments made at the idea stage start out looking poor and are made by “knowers”. In that case, they can be viewers and people working on the project.
In the cryptocurrency world, the same question is asked: how can a crypto code replace our monetary system, contract system and payment system?
The first websites were crude, limited, slow and annoying. Skeptics would look at the words “information superhighway” being thrown around by the auditors and think “how can that really be useful?” The overlooked element here is that ideas start out as the worst, and eventually evolve into something better. Sometimes this is due to better technology, greater scale and cheaper costs, better applications of the product in question, or product familiarity combined with great marketing. On the investment side, early adopters are coming in, but there is still no euphoria and astronomical returns. In some cases, the investments have yielded a decent return, but not enough to get the masses to jump on the bandwagon. It’s similar to slow internet connections in the 1990s, internet website crashes, or incorrect information in search engines. In the world of cryptocurrencies, high mining costs of coins, slow transaction times, and account hacking or theft are common.
The internet starts saying this and “.com” is the hot new thing. Products and tangibility are being built, but due to the massive scale involved, it would be a huge expense and time before everyone could use it. The investment side of the equation begins to precede business development, as markets discount the potential of the business at the price of the investment. The euphoria is starting to materialize, but only among the first-timers. This is happening in the cryptocurrency world with the explosion of new “altcoins” and the huge media press that is getting the space.
This stage is dominated by the parabolic and potential returns that the internet offers. Not much thought is given to implementation or issues because “the returns are huge and I don’t want to miss out.” The words “irrational exuberance” and “mania” are starting to become commonplace as people are buying out of sheer greed. Bad and negative risks and largely ignored. The symptoms of the mania are: any company having.com in its name is red hot, analytics are thrown out the window in favor of optics, investment knowledge appears less and less among new entrants, there are expectations of 10 or 100 bagger returns. common and few people actually know how the product works or works. This has happened in the world of cryptocurrencies with the return of late 2017 and fluctuations in the shares of companies that have appeared hundreds of percentage points using “blockchain” in their name. There are also “reverse takeover offers,” where shell companies listed on an exchange but dormant change their names to something involving blockchain, and the shares are suddenly actively traded.
The Crash and Burn
The new product business scene is changing, but not as fast as the investment scene is changing. Eventually, a change in mentality appears and a huge sales spree begins. Volatility is huge, and many “weak hands” and removed from the market. Suddenly, analytics are being used again to justify that these companies are worthless or ‘overvalued’. Fear spreads and prices accelerate downward. Companies that don’t make a profit and survive on hype and future prospects implode. Incidents of scams and fraud to capitalize on greed come to light, causing more fear and selling of securities. Businesses with money are quietly investing in the new product, but the pace of progress is slowed because the new product is an “ugly word” unless the profits are convincingly demonstrated. This is happening in the cryptocurrency world with the collapse of loan schemes using cryptocurrency and larger incidents of coin theft. Some marginal coins are failing in value due to their speculative nature.
At this stage, the investment landscape is littered with stories of losses and bad experiences. Meanwhile, the great idea is becoming tangible and for the companies that use it, it’s a boom. It begins to establish itself in daily activities. The product starts to become the standard and viewers say it’s a real “information superhighway”. The average user notices the improvement in the product and starts taking it en masse. Companies with a real profit strategy take a hit in the crash and burn phase, but if they have the cash to survive, they make it through the next wave. This has not happened in the cryptocurrency world yet. The expected survivors are those with a tangible business case and corporate backing, but it remains to be seen who the companies and coins are.
The Next Wave – Business catches up with the ups and downs
At this stage, the new product is standard and the profits are obvious. The business case is based on profit and scale rather than the idea. A second wave of investment appears, starting with the survivors and expanding into another initial mania. The next phase was social media companies, search engines and online shopping, all of which are derivatives of the original product – the internet.
Manias work in a pattern that behaves in a similar way over time. Once you know the stages and thought process of each one, it’s easier to understand what’s going on and investment decisions become clearer.