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Why Are Psychedelic Stocks Crashing?

Over the last three months from the time of writing this article, MindMed (Nasdaq: MNMD, NEO:MMED) plummeted 31%, atai Life Sciences (Nasdaq: ATAI) fell 32% and Compass Pathways (Nasdaq: CMPS) has dropped 19%. And it’s hit more than the Big Three too — the entire Horizons Psychedelic Stock Index ETF (NEO: PSYK) portfolio is down about 18%. So, if the entire psychedelics business has dropped 15% to 40% in just three months, there must have been some massive negative triggers sucking the life out of these psychedelic stocks, right?

In examining the news from the previous quarter, it turns out that there haven’t been any unfavorable headlines about psychedelics at all. In fact, the issue appears to be the inverse: there have been no headlines at all. Sure, if you follow the space as closely as we do, you’ve seen a slew of good stories in the last quarter. MindMed is continuing to assemble an all-star team of scientists; atai is starting a clinical trial to treat Opioid Use Disorder with ibogaine; and Compass is purchasing an IP portfolio of novel psychedelic substances, to name a few examples.

However, there has been silence among individuals who just read mainstream financial news outlets. This is in contrast to the three months prior, when MindMed was uplisted to the Nasdaq, atai IPOed, and MAPS conducted a phase three clinical trial indicating that MDMA treated PTSD so well that 67% of patients no longer met the criteria for PTSD diagnosis (plus another 21% of people improved, but still had PTSD).

With these huge news reports, public figures and major financial backers of psychedelics enterprises, such as Kevin O’Leary and Florian Brand, appeared on major financial media sites, discussing the potential benefits of psychedelics as both therapies and investments. Psychedelic stocks were at all-time highs at the time, and the buzz in the business was tangible.

But, as any psychedelics industry watcher knows, the road to commercialization and disrupting the tens of billions of dollars market for mental health care therapy is long and winding. It will take these firms three to five years to establish that their drugs are both safer and more effective than current treatments for PTSD, depression, anxiety, ADHD and other conditions. Completing the clinical trial procedure is a marathon, not a sprint, which leads us to the present, when the initial excitement surrounding these stocks is dissipating and the realization that this will be a long haul has set in.

Anyone looking for quick gains has most certainly already left or will soon leave the industry. With this in mind, there are three factors that anyone considering investing in psychedelic stocks should keep in mind.

To begin, any psychedelic stock purchase should be considered a long-term investment with a time horizon of at least five years. No one can anticipate what will happen in the near future or how these pre-revenue enterprises will perform in the marketplace. However, if a psychedelics firm can enter a $15.6 billion market like treating depression with a considerably superior and successful product, it’s a good bet that the stock will be substantially higher in five or more years than it is now.

Second, these equities will most likely be volatile in the interim. It’s conceivable that, like with any potential budding technology business, the stock will swing drastically in both ways. Any investor in this field must be prepared to witness a 30% collapse in the value of these companies, with that drop lasting many months.

Third, as a retail investor, it is critical that you manage your money responsibly. Despite your enthusiasm for psychedelic stocks, be aware that it is still a volatile and developing business. Going all-in on these companies would not be a wise decision. Instead, diversify your holdings and reduce your exposure to the sector in case the worst-case scenario occurs. As we’ve previously stated, we’re extremely positive, but we suggest keeping your psychedelics portfolio at a maximum of 10% of your whole portfolio.

The psychedelic renaissance is well underway; all we need now is a little patience.

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