Millennials and members of Generation X and Y cumulatively represent a demographic accustomed to practices such as irrational consumption. The bell doesn’t ring? Well, imagine you’re standing at the checkout counter at your local H&M store, and are only buying a pair of socks or hats because the waiting gets you bored. We are governed by emotions and succumb to our urges and impulses. This characteristic feature can, to some extent, be extrapolated to our investment behavior as well.
The phrase ‘irrational enthusiasm’ first came into existence when former Federal Reserve Chairman Alan Greenspan clarified the fact that Internet startup stocks were starting to overheat and attributed the trend to investors acting overly optimistic. Irrational euphoria is characterized by a state of frenzy that leads investors to massively overestimate asset values and, as a result, asset prices warrant unreasonable inflation. In this situation, investors become so infatuated with the desire to profit that they ignore the fundamentals of the asset and try to push the prices higher. This causes peers to invest in whatever asset is growing, creating an asset bubble. This bubble is supported by a larger illusion that a price increase is justified. However, when the bubble bursts, optimism turns to panic as assets return to their underlying values. This collapse also causes a ripple effect in other asset classes, leading to an economic contraction that eventually gives way to a recession.
Let’s look at the 1990s. It was a prosperous and optimistic decade; Well for the most part, because it ended with the dot com bubble bursting. Initially, the pace of Internet culture was slow, partly due to the lack of user-friendly web browsers. However, the release of the Mosaic browser in 1993 made the Internet increasingly accessible to the public. Netscape launched its IPO in August 1995, and within five months, Netscape’s stock price skyrocketed.
This internet startup craze, popularly known as the dot com bubble, arose due to a number of external factors such as the East Asian financial crisis, the ruble crisis and the launch of the euro.
The period between 1998 and 2000 was characterized by the Silicon Valley Gold Rush, with dozens of new startups being launched every week. The Nasdaq reached 5,048 in mid-March 2000, dropped to 3,321 in April, and then finally bottomed out at 1,114 in October 2002. So the dot com bubble, finally, burst.
However, soon thereafter, investor fanaticism for technology was replaced by globalization and investors moved back to the housing sector. This resulted in another bubble, and this time in the real estate sector. This makes it perfectly clear how some short-term phases of enthusiasm are unfounded and lack the basis to stand on any other economic parameters. The enthusiasm in the markets can also be attributed to the influx of liquidity across various geographies resulting from the active pursuit of unmatched fiscal and monetary stimuli.
A very popular parallel that is often drawn in terms of irrational enthusiasm is that the case of the crypto market is similar to that of the dot com bubble. There are very clear reasons for this, namely the sheer similarity between the emergence of early applications of disruptive communication technology and the largely volatile market that has emerged around the blockchain ecosystem. The recent disruptive trends in the crypto market make the similarities all the more conspicuous.
A person invests in the crypto market not because of a belief in their fundamentals, but because of an inherent FOMO (fear of missing out) when being part of a scheme that is going to make you rich quickly. The pandemic has certainly become too long, and people have started looking for alternative sources of income. Cryptos are lucrative and lucrative investment avenues. One could argue that the crypto bubble is made up of players who have sufficient knowledge of the market in the case of the dot com bubble. So, it’s fair to assume that the story might end a little differently this time around. Some even argue that almost every market is a bubble and that growth can only be secured through a series of inflation and pop.
Obviously, a continued drop in prices is inevitable as per the trends for 2021, but the sun may be shining on the crypto market as well, just as the internet industry eventually flourished.
This goes to the extreme to reinforce the notion that nothing significant was ever created without a little irrational enthusiasm. So, what tide will the crypto market surf? Maybe we should let time be the better judge.
Anand K. Rathi is the Managing Partner and Strategy Head at Augment Capital Services.
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