What is obsession? It is defined as a mental illness characterized by intense excitement, euphoria, delusions and hyperactivity. In investing, this translates into investment decisions driven by fear and greed, untempered by analysis, reason or risk-reward balance. The craze usually runs parallel to the business development of the product, but the timing can sometimes go wrong.
The technology.com 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 in this article.
The idea stage
The first stage of obsession begins with a great idea. The idea is not yet known to many people, but the earning potential is huge. This usually translates to unlimited profit as “nothing like this has ever been done before”. The Internet was one such case. People using the paper systems of the time were skeptical like “how can the internet replace such a familiar and established system?” The backbone of the idea begins to build. This turned into the modems, servers, software and websites needed to turn the idea into something tangible. Investments at the idea stage start faintly and are made by people “in the know”. In this case, it could be visionaries and people working on the project.
In the cryptocurrency world, the same question is asked: How can a piece of crypto code 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” that the visionaries uttered and say “how can this really be that useful?” The forgotten element here is that ideas start at their worst and then evolve into something better and better. This sometimes happens because of better technology, greater scale and cheaper costs, better applications for the product in question, or better product knowledge combined with excellent 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 made decent returns, but not enough to get the masses on board. This is analogous to slow internet connections in the 1990s, websites crashing or information being incorrect in search engines. In the cryptocurrency world, this is seen by the high cost of mining coins, slow transaction times, and account hacking or theft.
Word is getting out that this internet and “.com” is the hot new thing. Products and tangibility are being built, but due to the sheer scale, the cost and time involved would be huge before everyone uses it. The investment aspect of the equation begins to outpace business development as markets reduce business potential at the cost of investment. The euphoria is starting to materialize, but only among the early adopters. This is happening in the cryptocurrency world with the explosion of new “altcoins” and the big media press the space is getting.
This stage is dominated by the parabolic returns and 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 words “irrational exuberance” and “obsession” are starting to become common as people buy out of sheer greed. Adverse risks and negativity and largely ignored. Symptoms of the craze include: Every company with a.com in its name is red-hot, analytics thrown out the window in favor of optics, investment knowledge becoming less and less apparent among new entrants, expectations of returns of 10 or 100 bags is common and few people actually know how the product works or doesn’t work. This played out in the cryptocurrency world with the stellar returns of late 2017 and incidents of companies using “blockchain” in their name jumping hundreds of percentage points. There are also “reverse takeovers” where the names of shell companies that are listed but dormant are changed to something involving blockchain and the shares are suddenly actively traded.
The crash and burn
The business scene for the new product is changing, but not as fast as the investment scene is changing. Eventually, a change in mindset occurs and a huge sales boom begins. Volatility is huge and many “weak hands” have been wiped out of the market. Suddenly, the analysis is being used again to justify that these companies have no value or are “overvalued”. Fear spreads and prices accelerate downward. Companies that have no profits and that survive on advertising and future prospects are blown away. Incidents of scams and scams that are on the rise to take advantage of greed are exposed causing more fear and a sell off of securities. Businesses that have the money quietly invest in the new product, but the rate of progress slows because the new product is an “ugly word” unless the benefits are convincingly demonstrated. This is starting to happen in the cryptocurrency world with the folding of lending schemes using cryptocurrencies and more frequent cases of coin theft. Some of the fringe coins crash in value due to their speculative nature.
At this point, the investment landscape is charred with stories of losses and bad experiences. Meanwhile, the great idea becomes tangible, and for the businesses that use it, it’s a boom. It begins to be applied in daily activities. The product is starting to become a standard, and visionaries are quoted as saying that the “information superhighway” is real. The average consumer notices an improvement in the product and it begins mass adoption. Businesses that had a real profit strategy take a hit during the crash and burn stage, but if they have the money to survive, they make it to the next wave. This has not yet happened in the cryptocurrency world. The expected survivors are those with a tangible business case and corporate backing – but it remains to be seen which companies and coins those will be.
The next wave – business catches up with advertising
At this stage, the new product is the standard and the gains become obvious. The business case is now based on profit and scale, not the idea. A second wave of investment is emerging, starting with these survivors and extending into another early phase of mania. The next stage is characterized by social media companies, search engines and online shopping, which are derivatives of the original product – the Internet.
Manias work in a pattern that manifests itself similarly over time. Once one recognizes the stages and thought process of each, it becomes easier to understand what is going on and investment decisions become clearer.