What is mania? It is defined as a mental illness characterized by great excitement, euphoria, delusions and overactivity. When investing, this becomes investment decisions driven by fear and greed, without being mitigated by analysis, cause or balance of risk and reward results. The mania usually runs in parallel with the business development of the product, but sometimes time can be sloping.
The technology boom of the late 1990s and today’s cryptocurrency boom are two examples of how a craze works in real time. These two events will be highlighted with each stage of this article.
The stage of the idea
The first stage of mania starts with a great idea. The idea is not yet known to many people, but the potential for profit is huge. This usually translates as unlimited profit, as “something like this has never been done before.” The Internet was one such case. People using paper systems at the time were skeptical, “How can the Internet replace such a familiar and well-established system?” The backbone of the idea is beginning to take shape. This turns into modems, servers, software and websites needed to turn the idea into something tangible. Investments in the idea stage start weakly and are made by people who are aware. In this case, it could be the dreamers and the people working on the project.
In the world of cryptocurrencies, the same question is asked: How can part of the crypto code replace our monetary system, contract system and payment systems?
The first websites were rough, limited, slow and annoying. Skeptics would look at the words “information superhighway,” which the visionaries spewed, and say, “How can this really be so useful?” The forgotten element here is that ideas start at worst and then develop into something better and better. This sometimes happens due to better technology, larger scale and cheaper costs, better applications for the product in question or more knowledge of the product combined with great marketing. In terms of investment, early adopters are entering, but there is still no euphoria and astronomical return. In some cases, investments have brought decent returns, but not enough to push the masses to jump. This is similar to the slow internet connections in the 90’s, the crashes of websites or incorrect information in search engines. In the world of cryptocurrencies, this is reflected in high coin mining costs, slow transaction times, and hacking or account theft.
It’s starting to get heard that this internet and “.com” are the hottest new thing. Products and tangibility are constructed, but due to the huge scale, the cost and time spent will be huge before everyone uses it. The investment aspect of the equation is beginning to outpace business development as markets give way to business potential with the cost of investment. The euphoria began to take place, but only among early adopters. This is happening in the cryptocurrency world with the explosion of new “altcoins” and the big media that space is receiving.
This stage is dominated by the parabolic return and the potential that the internet offers. You don’t think much about performance or problems, because “the return is huge and I don’t want to miss it.” The words “irrational abundance” and “mania” are beginning to become common as people buy out of utter greed. Insufficient risks and negativism and largely ignored. Symptoms of mania include: Any company that has a name in its name is hot, the analysis is thrown out the window in favor of optics, investment knowledge becomes less and less obvious among new entrants, expectations of a return of 10 or 100 Packages are common and few people actually know how the product works or doesn’t work. This took place in the world of cryptocurrencies with stellar returns from the end of 2017 and incidents with shares of companies that jumped hundreds of percentage points using a “blockchain” in their name. There are also “takeover offers” in which shell companies that are listed but inactive change their names to something involving a blockchain, and the shares are suddenly actively traded.
The accident and the burn
The business scene of the new product is changing, but not as fast as the investment scene. Eventually, a change in thinking occurs and a huge movement begins. Volatility is huge and very “weak hands” and erased from the market. Suddenly, analysis is used again to justify that these companies have no value or are “overvalued.” Fear is spreading and prices are accelerating downwards. Profit-free companies that survive through over-prospects and future prospects are blown away. Detections of fraud and fraud are revealed, which are increasing to take advantage of greed, causing more fear and selling off securities. Businesses that have the money are quietly investing in the new product, but the pace of progress is slowing down because the new product is an ‘ugly word’ unless profits are convincingly demonstrated. This is starting to happen in the world of cryptocurrencies with the folding of credit schemes using cryptocurrencies and higher cases of coin theft. Some of the marginal coins are collapsing in value due to their speculative nature.
At this stage, the investment landscape is charred with stories of losses and bad experiences. Meanwhile, the great idea is becoming tangible and for the business that uses it, it is a boom. It begins to be applied in daily activities. The product is beginning to become the standard, and visionaries have been quoted as saying that the “information superhighway” is real. The average consumer notices an improvement in the product and he starts mass acceptance. Businesses that have had a real profit strategy get hit during the disaster and burnout phase, but if they have the cash to survive, they get to the next wave. So far this has not 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 this will be.
The next wave – the business reaches the excitement
At this stage, the new product is standard and the profits become obvious. The business case is now based on profits and scale, not on the idea. A second wave of investment emerges, starting with these survivors and embracing another mania at an early stage. The next stage is characterized by companies for social media, search engines and online shopping, which are derivatives of the original product – the Internet.
Mania works on a pattern that is played in a similar way over time. Once one recognizes the stages and thought process of each, it becomes easier to understand what is happening and investment decisions become clearer.