What is mania? It is defined as a mental illness characterized by intense excitement, euphoria, delirium, and overactivity. In investing, this means that investment decisions are made by fear and greed, unmitigated by analysis, reason, or risk-reward balance. The craze usually parallels the business development of the product, but the timing can sometimes go wrong.
The technology.com boom in the late 90s and today’s cryptocurrency boom are two examples of mania operating in real time. These two events will be covered at each stage in this article.
The first stage of mania begins with a great idea. The idea is not yet known to many people, but the profit potential is great. This is usually translated as unlimited profits, as “something like this has never been done before”. The Internet was one such case. People who used the paper-based systems of the time were skeptical that “how could the Internet replace such a familiar and entrenched system?” The backbone of the idea begins to be built. This evolved into the modems, servers, software and websites needed to turn an idea into something tangible. Investments at the idea stage start in the dark and are made by people who are “in the know”. In case, it can be visionaries and people who work on the project.
The cryptocurrency world is asking the same question: How can a piece of cryptocode replace our monetary system, contract system, and payment systems?
The first websites were crude, limited, slow and annoying. Skeptics would look at the words “information superhighway” thrown around by visionaries and say, “How can it really be that useful?” The forgotten element here is that ideas start off as worse and then evolve into something better and better. Sometimes this is due to better technology, greater scale and lower cost, better application of the product in question, or greater familiarity with the product combined with superior marketing. In terms of investment, early adopters have entered, but there is no euphoria and astronomical returns yet. In some cases, the investment has yielded a decent return, but not enough to make the masses jump on the bandwagon. It’s like a slow internet connection in the 1990s, websites crashing, or wrong information in search engines. In the cryptocurrency world, this indicates high costs for coin mining, slow transaction times, and accounts being hacked or stolen.
Rumors are starting to spread that this Internet and “.com” is a new thing. Products and tangibles are created, but due to the sheer scale, the cost and time spent will be enormous before everyone starts using them. The investment aspect of the equation is starting to outpace business development as markets discount business potential with the cost of investment. The euphoria is starting to materialize, but only among early adopters. This is happening in the cryptocurrency world with the explosion of new “altcoins” and big press in the media gaining space.
This stage is dominated by parabolic profitability and the potential that the Internet offers. Not much thought is given to implementation or challenges because “the payoff is huge and I don’t want to miss out.” The words “irrational wealth” and “mania” are starting to become commonplace as people buy out of sheer greed. Unpleasant risks and downsides are largely ignored. Symptoms of the mania include: any company with a.com in its name is fired up, analysis is abandoned in favor of optics, investment knowledge becomes less and less apparent among new entrants, expectations of 10 to 100 bags of profit are common, and few on the really knows how the product works or doesn’t work. This played out in the cryptocurrency world, with stellar returns in late 2017 and incidents where companies’ shares rose hundreds of percentage points because of the use of “blockchain” in their name. There are also “reverse takeover offers”, where the names of listed but defunct shell companies are changed to something using the blockchain and the shares suddenly start trading heavily.
Crash and burn
The business scene for a new product is changing, but not as fast as the investment scene. Eventually, there is a shift in thinking and a huge sales boom begins. Volatility is massive, and many “weak hands” are wiped out of the market. Suddenly, the analysis is being used again to justify that these companies are undervalued or “overvalued”. Fear spreads and prices accelerate downward. Companies that do not make a profit and survive on hype and future prospects are lost. Cases of fraud and fraud are being discovered and are increasing to take advantage of greed, causing more fear and a sell-off of securities. Businesses that have money are happy to invest in a new product, but the pace of progress slows because the new product is a “bad word” unless there is a convincing demonstration of profit. This is starting to happen in the cryptocurrency world with cryptocurrency lending schemes collapsing and coin theft increasing. Some marginal coins fall in value due to their speculative nature.
At this stage, the investment landscape is charred with stories of losses and bad experiences. Meanwhile, a great idea gains traction, and it’s a boom for the companies that use it. This begins to be realized in daily activities. The product is starting to become the standard, and visionaries say the “information superhighway” is real. The average user notices the improvement of the product, and it starts to become widely distributed. Businesses that had a real strategy for making a profit get hit in the crash and burn stage, but when they have the money to survive, they move on to the next wave. This has never happened in the world of cryptocurrencies. Those with tangible business cases and corporate backing are expected to survive – but it remains to be seen which companies and coins those will be.
The next wave is business catching on to the hype
At this stage, the new product is the standard and the profit becomes obvious. The business case is now based on profit and scale, not the idea. A second wave of investment emerges, starting with the survivors and moving into another early stage of the mania. The next stage was characterized by social media companies, search engines and online stores, which are derivatives of the original product – the Internet.
Mania follows a pattern that plays out in a similar fashion over time. Once you recognize the stages and the thought process behind each one, it becomes easier to understand what’s going on and investment decisions become clearer.