The stages of a market hobby
What is a hobby? It is defined as a mental illness characterized by great excitement, euphoria, delusions and hyperactivity. When investing, this means that investment decisions are driven by fear and greed without being tempered by analysis, reason or the balance of risk and reward outcomes. The mania usually runs in parallel with the commercial development of the product, but time can sometimes be distorted.
The tech.com boom of the late 1990s and the cryptocurrency boom of today are two examples of how a mania operates in real time. These two events will be highlighted with each stage in this article.
The idea stage
The first stage of a hobby begins with a great idea. The idea is not yet known to many people, but the earning potential is huge. This is often translated as unlimited benefit, since “something like this has never been done before.” The Internet was one of those cases. People using the paper-based systems of the time were skeptical because “how can the Internet replace such a familiar and entrenched system?” The backbone of the idea begins 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 mediocre and are made by people “in the know.” In the case, they can be the visionaries and the people who work on the project.
In the world of cryptocurrencies, the same question is asked: How can a piece of cryptographic code replace our monetary system, contract system, and payment systems?
The posibilities
The first websites were clunky, limited, slow and annoying. Skeptics would look at the words “information superhighway” that the visionaries were spouting and say “how can this really be so useful?” The forgotten element here is that ideas start at their worst and then evolve into something better and better. This sometimes happens due to better technology, greater scale and lower costs, better applications for the product in question, or greater familiarity with the product combined with excellent marketing. On the investment side, early adopters are getting in, but no euphoria or astronomical returns yet. In some cases, the investments have had decent returns, but not enough to convince the masses to participate. This is analogous to the slow internet connections of the 1990s, internet sites crashing or incorrect information on search engines. In the world of cryptocurrencies, you see high coin mining costs, slow transaction times, and account hacking or theft.
acceleration
Word is beginning to spread that the Internet and “.com” are the new thing. The products and tangibility are being built, but due to the massive scale involved, the cost and time invested would be enormous before everyone uses them. The investment aspect of the equation begins to get ahead of business development as markets discount the potential of a business with the investment price. The euphoria is starting to materialize, but only among early adopters. This is happening in the world of cryptocurrencies with the explosion of new “altcoins”, and the great media press that the space is receiving.
the euphoria
This stage is dominated by parabolic returns and the potential offered by the Internet. Not much thought is put into implementation or problems because “the returns are huge and I don’t want to miss them.” The words “irrational exuberance” and “mania” are becoming commonplace as people buy out of sheer greed. Downside risks and negativity and largely ignored. Symptoms of mania include: any company with .com in its name is red hot, analytics is thrown out the window in favor of optics, investing awareness is less and less apparent among new entrants, Expectations of 10 or 100 bagger returns are common and few people really know how the product works or doesn’t work. This has played out in the world of cryptocurrency with the stellar returns of late 2017 and the incidents of company shares bust hundreds of percentage points by using “blockchain” in their name. There are also “reverse takeover bids” where fictitious publicly traded but dormant companies change their names to something blockchain-related, and the shares are suddenly actively traded.
The crash and the burn
The trading scene for the new product is changing, but not as fast as the investment scene is changing. Eventually, a mindset shift kicks in and a huge sell-off begins. The volatility is massive, and many “weak hands” disappear from the market. Suddenly, analysis is being used again to justify that these companies are worthless or “overvalued.” Fear spreads and prices accelerate downward. Businesses that are not making a profit and that survive on hype and future prospects are wrecked. Fraud incidents and scams escalating to take advantage of greed are exposed, leading to more fear and sell-off. The companies that have the money are quietly investing in the new product, but the rate of progress slows because the new product is “an ugly word” unless the gains are convincingly demonstrated. This is starting to happen in the cryptocurrency world with the closure of lending schemes using cryptocurrency and increased incidents of coin theft. Some of the fringe coins are falling in value due to their speculative nature.
Survivors
At this stage, the investment landscape is littered with stories of loss and bad experiences. Meanwhile, the great idea is becoming tangible and for the businesses that use it it is a boom. It begins 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 mass adoption begins. Companies that had a real profit strategy take a hit during the crash and burn stage, but if they have the cash to survive, they make it to the next wave. This has not happened in the world of cryptocurrencies so far. The expected survivors are those with a tangible business case and corporate backing, but it remains to be seen which companies and currencies they will be.
The Next Wave: Businesses Catching Up to Expectations
At this stage, the new product is the standard and the gains become apparent. The business case is now based on profit and scale rather than idea. A second wave of investment appears starting with these survivors and spilling over into another early-stage mania. The next stage was characterized by social networking companies, search engines, and online shopping, which are all derivatives of the original product: the Internet.
The conclusion
Hobbies work in a pattern that develops in a similar way over time. Once one recognizes the stages and the thought process in each one, it becomes easier to understand what is going on and investment decisions become clearer.
