Why Psychedelic Stocks Have Crashed in the Last 3 Months

It is no secret that for those invested in psychedelic stocks, the last few months have been rough.

At the time of writing, over the last 3 months, MindMed (Nasdaq: MNMD, NEO:MMED) is down a whopping 31%, atai Life Sciences (Nasdaq: ATAI) has plummeted 32%, and Compass Pathways (Nasdaq: CMPS) has fallen 19%. The carnage is not limited to the big 3 players either. When looking at the Horizons Psychedelic Stock Index ETF (NEO: PSYK), the entire portfolio is down about 18%.

Armed with this data, the question becomes, why?

Surely if the entire psychedelics industry is down between 15% and 40% in a paltry 3 months, there must have been some giant negative catalysts sapping the energy from these stocks, right?

Well, it turns out, in reviewing the news from the last quarter, that there really hasn’t been any negative headlines at all when it comes to psychedelics. In fact, the problem seems to be the exact opposite: There hasn’t been any headlines at all.

Sure, if you are an avid follower of the space like I am, you will have seen lots of small positive stories in the last quarter. A few examples are: MindMed continuing to build an all star team of scientists; atai beginning their clinical trial treating Opioid Use Disorder with ibogaine; or Compass acquiring an IP portfolio of novel psychedelic compounds.

But for those who just follow mainstream financial news sources, there has been near radio silence.

This contrasts with the 3 months before that, when MindMed was uplisted to the Nasdaq, atai IPOed, and MAPS published a phase 3 clinical trial showing that MDMA treated PTSD so well that 67% of patients no longer qualified to be diagnosed with PTSD (plus another 21% of people improved, but still had PTSD).

With these major news stories, public faces and large financial backers of psychedelics companies, such as Kevin O’Leary and Florian Brand, were on the major financial media outlets talking about the potential benefits of psychedelics, both as medicines and investments. At this time psychedelic stocks hit all time highs, and the excitement in the industry was palpable. 

But unfortunately, as any watcher of the psychedelics industry will know, the path to commercialization and disrupting the tens of billions of dollars market of mental health care treatment is a slow one. It will take 3-5 years for these companies to prove beyond a reasonable doubt that their medicines are both safe and more effective than current treatments for ailments like PTSD, depression, anxiety, ADHD and more. 

Completing the clinical trial process is not a sprint, but rather a marathon. Which brings us to the current moment, when the original hype surrounding these stocks is fading, and the reality that this will be a long slog has set in. Anybody chasing quick profits has likely already left the sector, or will do so soon.

With this in mind, it is important to reiterate 3 points for anyone thinking of making an investment in psychedelic stocks.

First, any investment into a psychedelic stock should be a long term investment, with a time horizon of 5+ years. No one can predict the immediate future and how these pre-revenue companies will perform on the markets in the short term. But if a psychedelics company manages to enter a market such as treating depression, which is a $15.6 billion market, with a far superior and effective product, then it is a good bet that in 5+ years, that stock will be much higher than it is now. 

Second, in the interim period of time, these stocks will likely be volatile. As with any potential emerging technology company, it is quite likely we will see the stocks swing wildly, in both directions. Any investor in this space must be willing to see a 30% drop in the value of these companies, and have that low last for several months

Third, it is imperative that as a retail investor you be responsible with your money. Despite being a super bull on psychedelic stocks, I recognize that this is still a volatile and emerging industry. It would not be a smart bet to go all in on these companies. Rather, keep your holding diversified and limit your exposure to the sector in case the worst case happens. Like I said, I am exceedingly bullish, but I limit my psychedelics portfolio to 10% of my total portfolio, MAXIMUM.

The psychedelic renaissance has begun, we just need a little patience.

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Full Disclosure: James Hallifax holds positions in MindMed, Compass Pathways, atai Life Sciences, and the Horizons Psychedelic Stock Index

The views of the author are for informational purposes only, and should not be construed as financial advice, but rather his own personal opinion. Furthermore, the views of the author are not necessarily representative of Psychedelic Spotlight. His views and opinions are his own.