What is mania? It is defined as a mental illness characterized by strong excitement, euphoria, illusion and excessive activity. When investing, this leads to the fact that investment decisions are driven by fear and greed, without interfering with the analysis, causes or balance of risk and reward results. Usually mania runs in parallel with product development in business, but can occasionally go awry.
The technology boom of the late 1990s and today’s cryptocurrency boom are two examples of how mania works in real time. These two events will be highlighted at each stage in this article.
The first stage of mania starts with a great idea. The idea is not yet known to many, but the potential for profit is huge. This usually translates to unlimited profits, as “something like this has never been done before.” The internet was one such case. People who used paper systems at the time were skeptical of “how can the Internet replace such a familiar and entrenched system?” The backbone of the idea begins to build. This translates to modems, servers, software and websites needed to make the idea turn out to be material. Investments at the idea stage start small and are made by people “aware”. In this case, it could be visionaries and people working on the project.
In the world of cryptocurrencies, the same question is asked: how can a piece of cryptocurrency replace our monetary system, contract system and payment systems?
The first websites were rude, limited, slow and annoying. Skeptics would look at the words “information superhighway” that visionaries shouted and said “how can this be really helpful?” Here the element is forgotten – ideas start with the worst and then turn into something better and better. Sometimes this is due to better technology, larger scale and cheaper costs, better application for the product in question or greater familiarity with the product combined with excellent marketing. As for investment, early people are entering, but the euphoria and astronomical return is not yet there. In some cases, investments bring a decent return, but not enough to make the masses jump. This is similar to a slow Internet connection in the 1990s, a failure of Internet sites or incorrect information in search engines. In the world of cryptocurrencies, this indicates high costs for coin mining, slow transaction times and hacking or account theft.
It is rumored that this Internet and “.com” is the newest. Products and material construction are created, but due to large scale costs and time will be large before everyone will use them. The investment aspect of the equation is beginning to outpace business development as markets reduce business potential with the cost of investment. Euphoria is beginning to take place, but only among those who have adopted the early framework. It’s happening in the world of cryptocurrencies with the explosion of new “altcoins,” and the big media is pushing what space is getting.
This stage is dominated by the parabolic impact and potential offered by the Internet. Not much is thought about the implementation or the problem because “the profits are huge and I don’t want to miss out”. The words “irrational wealth” and “mania” become common when people buy because of pure greed. Disadvantages and negatives are also largely ignored. Symptoms of mania include: any company that has a name in the company 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 10 or 100 bag returns are common and few actually knows how the product works or doesn’t work. It happened in a world of cryptocurrencies with stellar returns in late 2017 and cases where company stocks jumped hundreds of percentage points using their name “blockchain”. There are also “reverse takeover offers” where subscriber companies that are listed on the stock exchange but do not work change their names 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 fast as the investment. Eventually, there is a shift in thinking and a huge rampage of sales begins. Volatility is massive, and many are “weak hands” and wiped out of the market. Suddenly, analysis is used again to justify that these companies have no value or are “overpriced”. Fear is spreading and prices are accelerating down. Companies that are unprofitable and that survive because of the hype and future prospects are blown away. Cases of fraud and fraud, which are increasing to take advantage of greed, are revealed, causing more fear and the sale of securities. A business that has money is quietly investing in a new product, but the pace of progress is slowing down as the new product is a “nasty word” if profits are not demonstrated convincingly. This is starting to happen in the world of cryptocurrencies with the curtailment of lending schemes using cryptocurrencies and higher cases of coin theft. Some marginal coins are lost in value because of their speculative nature.
At this stage, the investment landscape is scorched by stories of losses and bad experiences. Meanwhile, a great idea is coming into sensitivity, and for businesses that use it, it’s a boom. It is beginning to take root in everyday activities. The product is starting to become the standard, and visionaries are quoting, saying the “information highway” is real. The average user notices an improvement in the product and it starts to take root en masse. Businesses that had a real profit strategy get hit during the accident and burn phase, but if they have the money to survive, they move on to the next wave. So far this has not happened in the world of cryptocurrencies. Those who have a tangible business case and corporate support are expected to survive – but it remains to be seen what those companies and coins will be.
The next wave – the business is catching up with the hype
At this point, a new product is the standard, and profits become apparent. Now the business case is based on profits and scale, not on ideas. There is a second wave of investment that starts with survivors and moves on to another early stage mania. The next stage was characterized by companies on social networks, search engines and online shopping, which are all derivatives of the original product – the Internet.
Mania works on a pattern that over time plays out in a similar way. Once a person recognizes the stages and thought process on each, it becomes easier to understand what is happening and investment decisions become clearer.