The stages of a market mania

What is a craze? It is defined as a mental illness characterized by great arousal, euphoria, delirium, and hyperactivity. When it comes to investing, this means that investment decisions are driven by fear and greed without being tempered by the analysis, reason, or balance of risk and reward results. Mania tends to run parallel to the development of the product business, but time can sometimes go wrong.

The boom of the late 1990s and the current cryptocurrency boom are two examples of how a real-time craze works. These two events will be highlighted with each stage of this article.

The stage of the idea

The first stage of a craze starts with a great idea. The idea is not yet known to many people, but the potential for profit is huge. This usually translates into unlimited benefit, as “something like this has never been done before.” The Internet was one of those cases. People who used paper systems at the time were skeptical about “how can the Internet replace such a familiar, ingrained system?” The backbone of the idea is beginning to build. This translated into the modems, servers, software, and websites needed to turn the idea into something tangible. Investments in the idea stage start with little brilliance and are made by “known” people. In this case, they can be visionaries and people working on the project.

In the world of cryptocurrencies, the same question arises: how can a piece of crypto code replace our monetary system, the system of contracts, and the systems of payment?

The Possibilities

The first websites were raw, limited, slow and annoying. Skeptics would look at the words “information highway” that visionaries said and said “how can it really be so useful?” The forgotten thing here is that ideas start at the worst moment 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. In terms of investment, early adopters are coming in, but there is still no euphoria and astronomical returns. In some cases, investments have yielded decent returns, but not enough to make the masses jump. This is analogous to the slow internet connections of the 1990s, crashing Internet sites, or incorrect information in search engines. In the world of cryptocurrencies, there are high mining costs of coins, slow transaction times and piracy or account theft.

The acceleration

Word is spreading that this Internet and “.com” are the news. Products and tangibility are being built, but due to the massive scale involved, the cost and time spent would be massive before everyone uses it. The investment aspect of the equation is beginning to advance the development of the business, as the markets discount the potential of a business with the price of the investment. The euphoria begins to materialize, but only among the first adopters. This is happening in the world of cryptocurrencies with the explosion of new “altcoins” and the big media press that is receiving the space.

The Euphoria

This stage is dominated by parabolic performances and the potential offered by the internet. There isn’t much thought about implementation or problems because “the performance is huge and I don’t want to miss it.” The words “irrational exuberance” and “mania” are becoming more common as people buy out of sheer greed. Downside risks and negativity and largely ignored. Symptoms of the craze include: Any company in its name is in the red, the analysis is thrown out the window in favor of optics, the knowledge of the investment is less and less evident among new entrants, the expectations of returns of 10 or 100 baggers are becoming less and less evident. common and few people really know how the product works or doesn’t work. This has happened in the world of cryptocurrencies with stellar returns at the end of 2017 and incidents of the company’s actions arose hundreds of percentage points using “blockchain” in its name. There are also “reverse takeover bids” where fictitious companies that are listed on a stock exchange but are dormant have their names changed to something that involves blockchain and the shares are suddenly actively traded.

Shock and burning

The business scenario for the new product is changing, but not as fast as the investment scenario. Eventually, a change of mindset ensues and a big sale begins. Volatility is massive, and many “weak hands” and erased from the market. Suddenly, the analysis is used again to justify that these companies have no value or are “overvalued.” Fear is spreading and prices are accelerating downward. Companies that make no profit and survive with exaggeration and future prospects are exploding. Incidents of fraud and increasing scams to take advantage of greed are exposed, causing more fear and sale of securities. Companies that have the money are quietly investing in the new product, but the pace of progress is slowing because the new product is “an ugly word,” unless the benefits are convincingly proven. This is beginning to happen in the world of cryptocurrencies with the folding of loan schemes that use cryptocurrencies and the highest incidents of currency theft. Some of the marginal currencies are falling in value due to their speculative nature.

The survivors

At this stage, the investment landscape is charred with stories of losses and bad experiences. Meanwhile, the big idea is becoming tangible and for the companies that use it, it is a boom. It is beginning to be implemented in day-to-day activities. The product is starting 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 a massive adoption. Companies that had a real profit strategy receive a hit during the crash and burn stage, but if they have the cash to survive, they move on to the next wave. This has not yet happened in the world of cryptocurrencies. Expected survivors are those who have a tangible business case and corporate support, but it remains to be seen what companies and currencies they will be.

The next wave: the business is up to date

At this stage, the new product is the standard and the benefits are evident. The business case is now based on profit and scale rather than idea. A second wave of investment appears that begins with these survivors and extends to another initial phase of mania. The next stage was characterized by social media companies, search engines and online shopping, which are all derived from the original product: the Internet.

The conclusion

Manias work with a pattern that develops similarly over time. Once the stages and the thought process of each are recognized, it is easier to understand what is happening and the investment decisions become clearer.