What is a mania? It is defined as a mental disorder characterized by extreme excitement, euphoria, delusions and overactivity. In investing, this translates into investment decisions driven by fear and greed without analysis, factor or balancing risk and reward outcomes. The mania usually runs parallel to the commercial development of the product, but the timing can sometimes run diagonally.
The technology dotcom boom of the late 90s and today’s cryptocurrency boom are two examples of how a mania works in real time. These two events will be highlighted at each stage in this article.
The first phase of a mania starts with a great idea. The concept is still not known to many, but the profit potential is huge. This is usually translated as unlimited profit, since “nothing like this has ever been done before”. The Internet was one such phenomenon. People using paper systems at the time were skeptical that “how could the Internet replace such a familiar and entrenched system?” A backbone of ideas begins to form. This translates into the modems, servers, software and web sites needed to turn the idea into something tangible. Investments at the idea stage start out lazily and are made by “in the know” people. In cases, it can be the visionary and the people working on the project.
In the cryptocurrency world, the same question is being asked: How can a piece of crypto code replace our financial system, contract system and payment system?
The first web sites were crude, limited, slow and boring. Skeptics would look at the term “information superhighway” that the visionaries were spouting and say “how could this really be useful?” The forgotten element here is that ideas start at their worst and then evolve into something better and better. This is sometimes due to better technology, more scale and cheaper costs, better applications for the product in question, or more familiarity with the product combined with great marketing. On the investment side, early adopters are getting in, but there is still no excitement and astronomical returns. In some cases, the investments have yielded decent returns, but not enough to make the public jump in This is analogous to slow internet connections in the 1990s, internet sites crashing or search engines having incorrect information. In the cryptocurrency world, this is being witnessed due to high mining costs for coins, slow transaction times and account hacking or theft.
Word is starting to get out that this is the Internet and “.com” is the hot new thing. Product and clarity are being built, but because of the larger scale involved, costs and time will be spent before everyone uses it. The investment side of the equation begins to get ahead of business development as the market discounts business potential with investment value. The excitement is starting to materialize, but only among early adopters. This is happening in the world of cryptocurrency with the explosion of new “altcoins”, and that is getting big media press.
This phase is dominated by parabolic returns and the potential 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 terms “exuberance” and “mania” began to become common as people bought out of sheer greed. Negative risks and negativity and are widely ignored. Signs of mania include: any company with a dotcom in its name is red hot, analytics are thrown out the window in favor of optics, investment knowledge among new entrants is low and obvious, expectations of 10 or 100 bagger returns are common, and few people actually know how the product works. or doesn’t work. This played out in late 2017 with great returns in the cryptocurrency world and cases of shares of companies using “Blockchain” in their name popping hundreds of percentage points. There are also “reverse takeover offers” where shell companies that are listed but inactive on exchanges are renamed to something involving blockchain and the shares are suddenly actively traded.
Crash and burn
The new product business landscape is changing, but not as fast as the investment landscape is changing. Finally, a switch in mentality appears and a huge selling game begins. Volatility is widespread, and many “weak hands” have been removed from the market. Suddenly, analytics are again being used to justify that these companies have no value or are “overvalued”. Fear spreads and prices accelerate downwards. Companies with no earnings and those that survive on hype and future prospects are dismissed. Cases of fraud and scams are exposed to take advantage of greed, which causes more fear and selling of securities. Businesses that have money are quietly investing in new products, but progress slows because the new product is “an ugly word” unless profitability can be convincingly demonstrated. This is starting to happen in the cryptocurrency world with lending schemes using cryptocurrencies folding and high incidences of coin theft. Some marginal currencies are crashing 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 coming into clarity and it’s a roar for the businesses that use it. It continues to be implemented in daily activities. The product begins 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 to adopt it widely. Businesses that had a real profit strategy hit the crash and burn stage, but if they had the cash to survive, they moved on to the next wave. This has never happened in the cryptocurrency world yet. The expected survivors are those with a real business case and corporate backing – but which companies and coins that will be remains to be seen.
The Next Wave – Business Catches Up to the Hype
At this stage, the value and profit of the new product are becoming obvious. Business cases are now based on revenue and scale rather than ideas. A second investment wave begins with these survivors and extends to another early-stage mania. The next phase was characterized by social media companies, search engines and online shopping which were derivatives of the original product – the Internet.
Mania acts in a pattern that continues in the same fashion over time. Once one recognizes each phase and thought process, it becomes easier to understand what is going on and investment decisions become clearer.