Bigger Bubble: Cryptocurrencies or Cannabis?

With marijuana companies such as Aurora Cannabis Inc. (TSX:ACB) more than doubling in a month, and cryptocurrencies smashing all-time highs, the question remains: Is this a bubble, or a wave of the future?

| More on:

As cryptocurrencies around the world continue to shatter records, and cannabis companies continue to prepare for high demand when cannabis officially becomes legalized in 2018, investors looking for quick gains have certainly cashed in of late by pouring their money into these two attractive sectors.

Positive sentiment and market hysteria aside, many analysts have noted that both the cryptocurrency segment and the cannabis industry are exhibiting concrete signs of overvaluation, creeping into bubble territory. With companies such as Aurora Cannabis Inc. (TSX:ACB) more than doubling over the past month (a 137% gain at the time of writing), and other major Canadian producers such as Canopy Growth Corp. (TSX:WEED) increasing 37%, and Aphria Inc. (TSX:APH) increasing 56% over the past month alone, it can be hard for investors to ignore such massive returns in such short amount of time.

Here are a few things to consider when assessing (1) if a bubble truly exists in these sectors, and (2) what the ceiling for growth expectations could be moving forward.

Bubble or no bubble?

Among the criteria for an investment to morph from being a prudent long-term capital growth strategy to pure speculation are the following:

A belief that prices will continue to rise based on positive sentiment and the feeling of others. The Nash equilibrium/game theory stuff you learned in economics 101 comes into play here — it is not necessarily the fundamentals of the company that matter, but what the general public believes others will do (buy or sell) with respect to a particular stock or sector.

A lack of understanding or a misunderstanding of the fundamental properties supporting said company or sector. Ask most investors in blockchain to describe accurately the exact components of the technology and how this technology works, and most of the time you’ll get a boiler-plate answer or no answer at all. Ask a marijuana investor the metrics used to justify said investment, size of the potential market, and forward valuation multiple ascribed to said company, and you may receive a blank stare.

Sophistication of investor base decreases over time. The idea that “smart money” (i.e., hedge funds and institutional investors) perhaps know more than the small retail investors looking to grow their TFSA or RRSP is a generally accepted principle. When institutional money steers clear of a sector (in general), and the vast majority of the rise of these cannabis ventures relies on continued “mom & pop” investment from investors and stoners alike, problems may be waiting around the corner.

Bottom line

With the recreational cannabis industry unlikely to be substantially larger than the current medical marijuana industry (those who will smoke weed heavily in 2018 likely already do), and large risks to the cryptocurrency sector stemming from a potential hack (which would be very bad news), flash crash, or a number of other serious potential threats on the horizon, the classification of “bubble” appears to me to be correct.

Who knows? Maybe Bitcoin will hit $100,000 at the end of 2018 and cannabis stocks will increase 500% next year across the board. I’m just not so sure.

Stay Foolish, my friends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

More on Investing

TFSA and coins
Dividend Stocks

Maximize Your Retirement Income: How to Turbocharge Your TFSA Returns

TFSA investors could pick different strategies to boost returns.

Read more »

dividends grow over time

Dividend Aristocrats: Canadian Stocks That Keep Paying Year After Year

Top Canadian stocks like Bank of Nova Scotia (TSX:BNS) also qualify as Dividend Aristocrats that you can trust for the…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Canadian Utilities Is a “Dividend King,” But I Like This Stock Even More

Canadian Utilities (TSX:CU) stock is a solid dividend provider, but there's more to look at then just how much you're…

Read more »

Path to retirement
Dividend Stocks

Retire Rich: TFSA Stocks to Power Your Golden Years

Investing in your TFSA early has huge benefits. Here’s a look at some stocks for your TFSA that can power…

Read more »

stock research, analyze data
Tech Stocks

2 Artificial Intelligence-Powered Growth Stocks to Buy Right Now

These growth stocks are excellent buys today, and much of the reason for that is powered by their use of…

Read more »

Retirees sip their morning coffee outside.

TFSA: 3 Top TSX Stocks for Your $6,500 Contribution

These three TSX stocks could be ideal additions to your TFSA in this uncertain outlook.

Read more »

edit Sale sign, value, discount

Dollarama: A Bargain Stock for a Bargain Hunter

Dollarama continues to fire on all cylinders, and with it now trading off its 52-week high, it's one of the…

Read more »

Bank Stocks

Is This the Perfect Time to Invest in Canadian Banking Stocks?

Canadian banking stocks have continued to perform pretty poorly over the last few months, but that could mean a great…

Read more »