A short while ago, I’ve published a video about pump and dump schemes on my One Minute Economics YouTube channel and made it clear that despite people mostly using the term when talking about penny stocks (the penny stock video was published first, then the one about pump and dump schemes in general), other assets can be pumped and dumped as well.
Which brings me to the topic of Chinese investors.
I’ve closely monitored the behavior of Chinese investors when it comes to domains (especially during the short domain mania of late 2015 to early 2016) and even if not as closely, have also analyzed their behavior when investing in cryptocurrencies such as bitcoin as well.
My conclusion was a no-brainer: most Chinese investors (not all but most) operate in a “pump and dump” manner.
Now please note that I’m not saying they’re doing it deliberately.
Some are (a lot of manipulation takes place in the short domain business) but most Chinese investors are acting in a pump and dump manner without realizing it.
In other words, they exhibit what I’d call herd mentality on steroids.
They invest in “hot” assets more and more aggressively, even borrowing money at high (loan shark level) interest rates in some cases. That would be the pump phase or if you will, the “Look, the Chinese are buying” phase:
1) Chinese interest drives prices up
2) other investors want a piece of the action as well (textbook asset bubble behavior)
3) prices go up even more, this time not only due to Chinese demand
… eventually, something breaks and the “dump” phase begins.
Sometimes due to an external event (regulations in China, for example), sometimes simply because the market ran out of steam.
The “dump” phase is characterized with an abrupt loss of interest, frequently accompanied by an increase in interest in other assets among Chinese investors.
All of this is pretty fascinating in my opinion.
Again, do keep in mind that not all Chinese investors act this way.
Most however do.
Why should you care?
Well, China isn’t exactly going away and as such, Chinese capital will probably shape assets classes more and more as time passes.
A new player has emerged and he’s here to stay.
As such, it’s important to understand that player’s behavior because it ultimately affects your bottom line.
I’m fairly confident in my assessment that Chinese investors tend to exhibit “pump and dump” behavior when investing, so I’d say the conclusion of today’s post is fairly straightforward.
It would also be interesting to talk about WHY the Chinese invest this way but that is a topic for another post