Noam Levenson - writer, researcher, blockchain investor, chairman and co-founder of Eden Block - studied the phenomenon of the cryptocurrency bubble (yes, in his opinion it is a bubble) through the prism of the dot-com crash at the beginning of the century and identified signs that will warn us that The bubble has reached its limit and is about to burst. In work on the original material Popping The Bubble: Cryptocurrency vs. Dot Com, published by Hacker Noon. We offer you a translation.
Bubble. Not since I celebrated my birthday in third grade have I heard this word more often than now. This is the “kryptonite” of every crypto investor, the most popular agenda, CNBC’s favorite buzzword. It doesn't matter which reporter is speaking - the term is always pronounced with the same emotion a stunned deer that was blinded by car headlights on the highway at night, and is accompanied by the warning: “In fact, we have no idea about the subject in question.”
Whenever someone claims that cryptocurrencies are a bubble, I resist the instinctive urge to argue. It's like hearing someone twist quotes from your favorite movie. Typically, people claim a bubble without even a shadow of an understanding of the nature of blockchain, Bitcoin... and bubbles. However, while the CNBC reporter throws darts blindfolded and hopes to hit the bull's-eye, there may be some truth to the bubble claims.
First, here's the definition of a bubble: “Trading an asset at a price or price range significantly higher than actual cost asset."
I will use two indicators: speculation And application. We speculate about what use the asset will find in the future, comparing it with its actual use. The largest bubbles form when there is a serious mismatch between speculation and application. That's why new technology noise-canceling headphones will likely not cause a bubble. The application of this technology is quite obvious: to drown out the screams of newborn babies, which leaves no room for speculation. There is no room for assumptions in this industry; In addition, the technology affects only a single sector, so the potential for its mass distribution is small.
Think about the Internet at its inception, or about distributed ledger technology (this term refers to all technologies of this kind: directed acyclic graphs, hashgraphs, etc.) today. The Internet has connected and transformed almost every existing industry. Today, distributed ledger technology has the potential to do the same, spanning industries from peer-to-peer payments, finance and the Internet of Things to healthcare, contracts and supply chain. The real potential is there, but the application is not there yet. This creates an environment in which a massive bubble can inflate. Everyone can speculate to their heart's content, since there is no way to refute speculation. Tell me that the toaster will revolutionize the automobile industry and I'll tell you that's bullshit. Technologies similar to toaster technology, didn't produce such a revolution, so we are talking about baseless speculation. But tell me that distributed ledger technology will radically change the airline industry, and it will be a compelling proposition that I cannot refute.
It is impossible to deny that we are dealing with a bubble.
And this leads me to the following conclusions. Key characteristics of any bubble:
- wide distribution;
- extremely narrow and limited scope of application at present;
- the asset has no fundamental value - it is difficult to value.
Theoretical uses of distributed ledger technology will only add to the speculation. However, real working applications will eventually emerge. New challenges will arise. The scale of technology implementation will increase dramatically. But since the level of speculation was so high, application was bound to fall short of expectations. When it becomes clear that application will never live up to speculation, a market correction will occur and hard capitalization will be achieved. The bubble will burst.
This is exactly the fate that awaits shitcoins.
We're talking about the internet bubble, the great depression, having an accident on your first day behind the wheel. Markets will fall so rapidly that speculation will suddenly be out of use. The market will suddenly become fundamentally undervalued. And it will remain in this state for months, after which it will be reborn from the ashes when the strongest companies manage to lead its upward movement.
However, unlike many people who talk about a bubble to discourage people from investing, I talk about it in a different sense. We are always in a bubble; Almost every market is a cycle of “inflating” and “exploding” a bubble. Even the $18.5 trillion New York Stock Exchange. follows this cycle; As speculation grows about the future of the American economy, reality must eventually assert itself. When the market overestimates reality, a bubble forms. When reality fails to meet these expectations, the market crashes. The magnitude of the collapse is not necessarily as dramatic as in the cryptocurrency markets, where it reaches 40%, but the fact that bubbles are a natural part of the investing process is beyond doubt.
So the question is not whether we are in a bubble, but what the size of the bubble will be. If we respect the natural evolution of advanced technology, we must understand that every massive speculative price hike is followed by an equally massive crash. From the tulip mania of the 1600s to the Internet bubble of just 15 years ago, crashes are inevitable. What matters is what the bubbles of the past can teach us and to what extent we can use these lessons as a guide when working in the cryptocurrency market.
Philosopher George Santayana wrote:
People who cannot remember the past are doomed to repeat it.
And as Peter Lamborn Wilson said even more aptly:
People who understand history are doomed to watch idiots repeat it.
The psychological factor underlying large-scale speculative buying lies in human nature itself. Bubbles follow the same pattern regardless of the era or nature of the asset. Fish swim, birds peck grain, and people engage in speculative buying.
Based on this principle, we can study past bubbles to understand the current cryptocurrency bubble. By understanding the causes, symptoms and consequences, one can better anticipate its trajectory. Become a person capable of playing the short game and winning in it.
I want to clarify: my argument does not boil down to Bitcoin. Bitcoin's value is inconclusive. Due to the low speed of transaction processing and high commissions, Bitcoin lacks functionality, and therefore its value depends significantly on how people perceive it. On the other hand, distributed ledger technology has serious application potential. Once again, I will emphasize that when considering speculation and application, I intend to prioritize projects based on distributed ledger technology in general, and not Bitcoin.
The implementation of any technology follows the following route:
Technology Acceptance Curve
This phenomenon is known as technology acceptance curve. It is directly related to what I wrote above about speculation and application. The driving force of development at stages emergence of innovation, appearance of the first clients And early majority formation speculation appears.
But by the time a new technology begins to be adopted by a belated majority, the need for real implementation and application becomes critical; the degree of implementation does not correspond to the level of mass speculation, and a collapse begins.
In the 1630s, Holland experienced a tulip boom, known today as Tulip Mania. According to historical evidence, tulip prices rose by 2000% in four months, after which they fell by 99%. In the late 1980s, Japan attempted large-scale economic stimulation, which led to massive speculation. From Investopedia: “At the peak of the real estate bubble in 1989, the value of the plot of land on which the Tokyo Imperial Palace stands was greater than the value of all real estate in the entire state of California. Subsequently, in the early 1990s, the bubble burst.” We know these events as the Japanese real estate and stock market bubble.
But for us, the most relevant example with which to compare current events will be the dot-com bubble of the 1990s, which burst in 2001-2002.
By the beginning of the new millennium, it became obvious that the Internet would change the world. He began to transform all industries and ushered in new economy, a new way of doing business, p2p communication... sound familiar? The application managed to justify all the speculation and even surpass it. It was perhaps the most significant and revolutionary technological innovation since the Industrial Revolution; some will say that it turned out to be even more significant. But, despite the stunning success, there was a huge collapse.
Let's move the clock back 22 years. It's 1999, and you're a savvy investor enthusiastic about the Internet revolution. The top six tech companies are worth $1.65 trillion, 20% of US GDP, yet you're constantly ridiculed by friends who think you're investing in the next fax machine. Feeble-minded.
You know that if you do your due diligence, you will find golden dot-com companies worth investing in. One day one of them catches your attention. The company meets all your requirements: a strong team (the two founders of Borders books) and strong support from traditional financiers (Sequoia Capital and Benchmark Capital - later Goldman Sachs).
This is a company called WebVan, which sells groceries online and promises delivery within half an hour. In 1999, it raised $375 million, after which it managed to quickly grow to $1.2 billion. Bullish trend, innovation? Sounds familiar! In July 2001, its shares on the stock exchange fell from $30 to 6 cents, and WebVan was losing $700 million a day.
Dotcom crash
In total, $5 trillion was lost between 2000 and 2002. This is the value of 25 Bitcoin markets. Pop - and they are gone! Only 50% of dot-com companies survived the bubble, and the other half became startup graveyards on Wall Street and Silicon Valley. Alas, the Internet was not developed enough back then to allow these people to express their grief in the form of memes.
What was the mistake?
IN modern world, where access to the network is possible from anywhere and perfect communication, it is difficult to imagine that the Internet once had a difficult time recruiting and developing a network of users. In the mid-1990s, the Internet still had minimal use, but websites "whatever.com" have already begun to multiply everywhere. It was enough to include “dot com” in the company name to get a lucky ticket to participate in the stellar IPO campaign; not to mention several hundred million in addition.
Pets.com, WebVan- the examples are countless. These were all stars that shone brightly and then set. Speculation grew too rapidly. It was too ahead of the fundamental value: users. Instead of speculation about it may become this phenomenon, suddenly came the understanding that what it became. Ultimately, speculation led to inflated valuations that destroyed many companies. Companies need a reality check; they need pressure and obstacles - a $500 million valuation immediately after an initial public offering does not lead to success. Unfortunately, it is not only poorly managed companies that suffer. Everyone showed negative growth, including NASDAQ, Amazon And Apple.
Apple stock during the crash - from a peak of $4.95 per share to $1.00 in just nine months
Now let's change the scale: the arrow points to the dot-com crash
Amazon's collapse was even more dramatic, from $85.06 in 1999 to $5.97 by 2001. When a market correction begins, no one is immune.
The same, but different?
Everyone is making comparisons between dot-coms and cryptocurrencies. The driving force behind these developments has been the promise of new technologies that are difficult to accurately evaluate. As we have already said, bubbles are bubbles, no matter what asset we are talking about. However, the rules of the game have changed. 2018 is not 2000. Should we focus on the dot-com bubble? Is distributed ledger technology destined for the fate of the Internet?
Let's look at the key differences between the two.
Roller coaster
If the dot-com bubble was your favorite roller coaster at Disneyland, then the digital asset market is the slingshot. (sling shot), which you “will definitely want to ride someday.” The blockchain market is growing faster than any other market. It is more volatile; it is possible with fortune profits and catastrophic losses.
Blockchain is like Texas, and in Texas everything is bigger...even losses. WebVan's demise of $700 million in daily losses falls short of some of the biggest losses in cryptocurrency history, such as Ripple's dark day, when the company lost $25 billion on January 8th of this year.
Ripple's Giant Volatility
These fluctuations are due to several factors, but primarily investor access to cryptocurrencies and the free flow of information on the Internet. Thus, the ninth wave of cryptocurrency volatility arises. In addition, the presence of many exchanges, both centralized and decentralized, creates preconditions for purchasing valuable papers for the purpose of resale and market manipulation.
Since insider trading and market abuses in the blockchain space are largely unregulated, you can be sure that they occur on a large scale. A millionaire can easily influence the price of a blockchain with a market capitalization of $5 million and a daily trading volume of $100,000. Financial sharks do not miss the opportunity to make extra money on small coins, and small investors are unable to distinguish between these manipulations and the mood of the market.
Global scale
Harvard does not hold its endowment in digital assets. Pension savings your parents are not stored in them either (and if so, sound the alarm!). These days, investors are not experienced institutional investors, but young people, inexperienced, prone to speculation and seeking easy and quick money.
During the rise of NASDAQ in the 1990s, investments could only be made through brokers and institutional investors; when it comes to cryptocurrencies, everyone can participate. You just need a device connected to the Internet. Even a shepherd from Pakistan can become a crypto trader. Day trading is perhaps more exciting than its main activity.
How much are sheep worth in Bitcoin?
These investors have 24/7 access to portfolios and receive constant updates on Twitter. They don't fully understand the technology behind these investments.
The Internet allows you to follow updates and receive information at a speed unimaginable before its invention. Very often this information is misleading. You can also run into outright fraud. As a result, panic selling and missed opportunity syndrome go hand in hand. Giant leaps are followed by collapses that are significantly greater than the collapse of the NASDAQ at one time.
But this also means that the crypto bubble could surpass the dot-com bubble in size. NASDAQ peaked at $5.048 trillion. in March 2000. This maximum was limited by barriers to investors, difficulty in quick exchange large amounts of information and the fact that dot-com investors were predominantly North American.
Cryptocurrencies are available to everyone who has some money and mobile phone, anywhere in the world. This means that by the time the world begins to understand the value of distributed ledger technology, $5 trillion. will seem like an insignificant number.
This also means that trying to predict when a bubble will inflate to its maximum is a fool's errand. Instead, we should pay attention to the indicators that literally scream that this moment is coming. Here they are:
- The media will begin to focus not only on Bitcoin (which they already do), but also on distributed ledger technology, its potential and related projects. This would mean that most of the population is already aware of the technology behind cryptocurrencies - a different situation than the current one, but CNBC is quickly making it real.
- Influx of institutional money: hedge funds, retirement accounts, personal savings. All this will lead to a dramatic increase in market capitalization.
- Working blockchain products that truly support large networks of users. As further development it will become obvious to us that many modern projects unable to meet expectations. The very first failed blockchain project will create a snowball effect.
- Significant influx of private, centralized blockchains launched by existing companies. Many expected decentralized solutions will give way to products from existing traditional companies, which will develop their own proprietary blockchain solutions in preference to decentralized, token-based platforms. It is very likely that this will lead to a massive re-evaluation of what blockchain actually is.
- Market capitalization in the region of $5-10 trillion. Any phenomenon of this magnitude will be a source of alarm. However, it is important to understand that it is the rate of expansion that creates the bubble, not the market capitalization itself. A quick breakthrough is almost always followed by a dramatic collapse.
The fact that the public and media are not yet aware of distributed ledger technology supports my opinion that we are still far from the apogee of the bubble. The world is just beginning to accept Bitcoin. It will take years for the masses to understand the true value of blockchain. In the meantime, the cryptocurrency will continue to progress, going through periods of significant volatility. However, the overall trend will be upward - and dramatically rapid, as the market moves towards its top and inevitably approaches a crash.
What makes the February crash different from the ultimate crash when the bubble bursts? Perhaps nothing. Perhaps digital asset markets will continue to rise, crash, rise, crash again until mass adoption brings stability. The recent collapse may be the most dramatic we have ever seen. However, I think it's important that nothing has fundamentally changed for assets.
This crash was entirely based on speculation and market uncertainty. I believe the ultimate collapse will occur due to a fundamental change in the underlying assets of the cryptocurrency. It is possible that a number of companies using distributed ledger technologies will cease development due to poor management or difficulties in implementation. It is possible that some large capitalization projects will have security gaps. Whatever happens, I think that at the moment of such an explosion, many blockchains will die, doomed to exist forever without the possibility of further development.
Conclusion
It may also be that blockchain and cryptocurrency will refute all predictions, all historical models. Perhaps blockchain will transform all industries and never face collapse, like that, which happened in the early 2000s. It is possible that blockchain and cryptocurrency will be able to compete with current stock markets. It is possible that decentralization will be so innovative and successful that it will fundamentally change the nature of the development of companies and projects, the nature of the psychological interaction of people with markets. It's possible... but I doubt it will happen. We may play a new game that requires courage, but we have a lot to learn from previous players and games.
Digital assets and distributed ledger technology have the potential to change the world. But this road will not be straight and smooth.
The dot-com crisis was an economic bubble and a period of stock market speculation and rapid development of the Internet in 1997-2001, accompanied by rapid growth in the use of the latter by business and consumers. Then many network companies appeared, a significant part of which failed. The bankruptcy of startups such as Go.com, Webvan, Pets.com, E-toys.com and Kozmo.com cost investors $2.4 billion. Other companies like Cisco and Qualcomm have lost large shares of market capitalization but have recovered to exceed their peaks during that period.
Dotcom bubble: how did it happen?
The second half of the 1990s saw the explosion of a new type of economy in which stock markets, influenced by venture capital and IPO-backed companies in the Internet sector and related areas, experienced high growth rates. The term “dot-com” that characterizes many of them refers to commercial websites. It was born as a term to identify companies with Internet domain names ending in .com. The large volumes of exchange trading were fueled by the fact that it was a new industry with high potential and difficulty in assessing market participants. Their reason was the high demand for shares in this sector from investors looking for new investment objects, which also led to the revaluation of many companies in this industry. At its peak, even those enterprises that were not profitable became participants stock exchange and were extremely highly rated, given that their performance indicators in most cases were extremely negative.
As far back as 1996, Alan Greenspan, then chairman of the Federal Reserve, warned against “irrational exuberance,” where smart investing was replaced by impulsive investing. 2000 technological stock index The Nasdaq peaked at more than 5,000, a day after a fire sell-off in tech stocks marked the end of the "new economy" rally.
Unsustainable investments
The invention of the Internet led to one of the biggest economic disruptions in history. The global network of computers dates back to the early research work 1960s, but it was not until the creation of the World Wide Web in the 1990s that it began to be widely disseminated and commercialized.
Once investors and speculators realized that the Internet had created a completely new and untapped international market, IPOs of Internet companies began to quickly follow each other.
One of the features of the dot-com crisis is that sometimes the valuation of these businesses was based only on a concept laid out on a single sheet of paper. The excitement about the commercial possibilities of the Internet was so great that every idea that seemed viable could easily receive millions of dollars in funding.
The basic tenets of investment theory regarding understanding when or whether a business will make a profit have been ignored in many cases because investors feared missing out on the next big hit. They were ready to invest large sums in companies that did not have a clear business plan. This was rationalized by the so-called. dot-com theory: in order for an Internet enterprise to survive and grow, it required a rapid expansion of its customer base, which in most cases meant huge initial costs. This statement has been proven true by Google and Amazon, two extremely successful companies that took several years to show any profit.
Irrational expenses
Many of the new companies spent the money they received thoughtlessly. Options made employees and executives millionaires on the day of the IPO, and the companies themselves often spent money on luxurious business properties, since confidence in the “new economy” was extremely high. In 1999, there were 457 initial public offerings in the United States, most of them by Internet and technology companies. Of these, 117 managed to double their value during the first day of trading.
Communications companies such as mobile network operators and Internet service providers began investing heavily in network infrastructure as they wanted to be able to grow with the needs of the new economy. To be able to invest in new network technologies and purchase wireless network licenses, huge loans were required, which also contributed to the approach of the dot-com crisis.
How .com companies became dot bombs
The Nasdaq Composite, an index of Wall Street-traded technology stocks, hit a high of 5,046.86 in 2000, doubling its value a year earlier. The next day, stock prices began to fall and the dot-com bubble burst. One of the direct reasons for this was the completion of the antitrust case against Microsoft, which was declared a monopoly in April 2000. The market expected this, and in the 10 days after March 10, the Nasdaq index lost 10%. The day after the official results of the investigation were released, the technology index experienced a large intraday drop, but came back. However, this was not a sign of recovery. The Nasdaq went into free fall as investors realized that many unprofitable new companies were indeed that way. Within a year of the dot-com crisis, most of the venture capital firms that had backed Internet startups lost all their money and went bankrupt when new funding dried up. Some investors have begun calling once stellar companies "dot bombs" because they have managed to destroy billions of dollars in a very short time.
On October 9, 2002, the Nasdaq hit a low of 1,114.11. This was a whopping 78% loss for the index from its peak 2.5 years earlier. In addition to the many tech startups, many communications companies were also struggling as they had to repay the billions of dollars in loans they had taken out to invest in network infrastructure, the payback of which was now suddenly delayed much further than expected.
History of Napster
Concerning legal issues Microsoft wasn't the only dot-com to go to trial. Another famous technology company of that era was founded in 1999 and was called Napster. She was developing an application that enabled digital music sharing over a p2p network. Napster was founded by 20-year-old Sean Parker and two of his friends, and the company quickly gained popularity. But due to copyright violations, it almost immediately came under fire from the music industry and eventually went out of business.
Multimillionaire hacker
Kim Schmitz perhaps best illustrates the action individual entrepreneurs regarding the dot-com crisis. This German hacker became a multimillionaire by launching various Internet companies in the 1990s and eventually changed his last name to Dotcom, a nod to what made him rich. In early 2000, just before the collapse of the new economy, he sold TÜV Rheinland 80% of his shares in DataProtect, which he founded, which provided data protection services. Less than a year later the company went bankrupt. In the 1990s, he was the central figure in a series of convictions for insider trading and embezzlement related to his technology businesses.
In 1999, he had a customized Mercedes-Benz that, among many other electronic gadgets, had a then-unique high-speed wireless Internet connection. He drove this car in the European Gumball Rally. when a lot of people in expensive cars compete on the roads common use. When Kimble (his nickname at the time) got a flat tire, a new tire was flown in from Germany on a jet plane.
He survived the effects of the dot-com crash and continued to launch new startups. In 2012, he was arrested again on charges that he illegally distributed copyrighted content through his company Mega. He currently lives in New Zealand in his $30 million home and is awaiting extradition to the United States.
Have investors learned their lesson?
Some companies that were launched during the dot-com bubble survived and became tech giants like Google and Amazon. However, most failed. Some of the entrepreneurs involved in the ventures were active in the industry and eventually created new companies, such as the aforementioned Kim Schmitz and Napster's Sean Parker, who became the founding president of Facebook.
After the dot-com crisis, investors became wary of investing in risky ventures and returned to evaluating realistic plans. However, in last years a number of IPOs thundered high level. When LinkedIn, a social network for professionals, went public on May 19, 2011, its shares immediately more than doubled, reminiscent of what happened in 1999. The company itself warned investors not to be too optimistic. Today, IPOs are conducted by companies that have been in business for several years and have good prospects for profit, if not already being profitable. Another IPO, in 2012, had been expected for years. Facebook's initial share issue was the largest among technology companies and set a record in terms of trading volume and the amount of investment raised, equal to $16 billion.
Finally
The dot-com bubble of the 1990s and early 2000s was characterized by new technology that created a new market with many potential products and services, and highly opportunistic investors and entrepreneurs blinded by early successes. Since the crash, companies and markets have become much more cautious when it comes to investing in new technologies. However, the current popularity mobile devices, such as smartphones and tablets, their almost limitless capabilities, as well as several successful IPOs, are opening the door to a whole generation of companies that will want to capitalize on this new market. The question is, will investors and entrepreneurs be smarter this time to avoid creating a second dot-com bubble?
In economics and finance there is such a term as a “bubble”.
Literally, this is a “pumping” of liquidity into an asset or an entire industry, as a result of which company shares show significant growth that is not supported by the real state of affairs.
There have been many such bubbles in human history. Suffice it to recall the tulip boom in the 17th century. At that time, flowers of this variety were considered a sign of luxury.
Therefore, the Dutch willingly gave money for the bulbs. This is how the so-called “tulip fever” began. It's not hard to guess how it all ended.
IN modern history There were several such booms. Among them, a special place is occupied by the so-called “dot-com bubble,” which grew until 2000, after which it burst. This was accompanied by a sharp drop in the NASDAQ index, which first reached its peak values and then fell by one and a half times in just one day.
This is a common noun for companies related to the Internet..
The term came to Russian from English. “dot” is translated as “dot”, and “com” is a domain zone that was originally created for commercial organizations(from "commercial")
Accordingly, dot-coms named the companies' organizations that were represented on the Internet.
With the advent of the global web, it became clear that it could be used not only for communication and gaining knowledge, but also for commerce. Naturally, numerous investors could not help but pay attention to this.
At the same time, the capitalization of Internet-related companies grew. Eg, search system Yahoo, popular at the time, was already worth $114 billion by the end of 1999.
Given these numbers, other investors have taken notice of the World Wide Web.
The number of Internet companies was growing and even those who had a completely different business model tried to reorient themselves and be represented online.
All this led to an increase in company shares. And investors, in turn, seeing this situation, invested more and more.
Moreover, many seriously believed that the IT market would only grow.
However, not only the general excitement led to an increase in the capitalization of this market. The fact is that the economies of the United States and Western Europe experienced instability at that time.
This provoked an increase in interest rates. Shares of IT companies were viewed by investors primarily as safe investments in a market that continues to grow no matter what.
Some giants were in danger of being divided. Product sales volumes fell.
There is an opinion that this crisis destroyed the IT market and most companies in it. However, this is not true. In fact, about half of all firms survived, which is a pretty good indicator.
Causes of the dotcom bubble
One of the main reasons that contributed to the bubble was that technology was too overvalued.
The fact is that the Internet is not a business itself, but only a tool for running it. But many apologists did not see it that way.
They were echoed by dishonest businessmen who understood everything, but wanted to profit from new investments in the industry.
However, it is the use of the Internet that increases the possibilities of conducting certain types of business, in particular, international retail chains, exchanges or online auctions. For example, today it is difficult to imagine the work of Amazon without the global web.
This is not to say that it would be impossible. The fact is that such companies existed before the advent of the Internet. The order could be made, for example, from catalogs. However, it was a long process. The Internet has significantly speeded up the ordering procedure itself.
Moreover, it allowed literally everyone to gain access to a platform where you can buy everything from books to software, working tools and much more.
It is enough to go to the website of the same Amazon, which is known on all continents.
Thanks to the Internet, investors have the opportunity to conduct transactions without leaving home. Previously, this required either personal presence or a phone call. Today, an investor can use a platform connected to any exchange and make transactions there.
However, despite all this, at the beginning of 2000, it became clear to many experts that this market was greatly overvalued. And one of the underlying reasons was precisely that they tried to sell people a tool for business, passing it off as ready-made business model.
Among other reasons that could collapse the market are:
What happened next
The collapse of the dot-com market led to the bankruptcy of many companies in this industry. Some firms have been caught falsifying reports, as well as conducting illegal banking operations in order to increase profits.
This applies to WorldCom, one of the major players in the industry. As soon as this information became known to the public, the company's price plummeted and led to bankruptcy.
Others simply ran out of money and were forced to close or sell. Other firms were accused of misusing investors' funds (most likely, this means wasting money on advertising instead of innovation).
The accusations affected not only companies in this area, but also investment funds like Citigroup or Merrill Lynch.
They were accused of misleading investors.
The fall of the dot-com market affected not only IT companies, but also related areas that offered their services to such companies.
Another problem was the employment of many specialists who found themselves literally on the street with the closure of companies.
During the dot-com boom, the demand for programmers grew steadily. But after the bubble burst, many were left without work. At that time, programmers in the United States were actively retraining for other professions.
But by 2004, the second dot-com boom began. The companies that survived the events of 2000 recovered and re-entered the fight for the Internet. Moreover, many companies have realized that the US market is already small for them and it’s “crowded.” They started working on other markets too. Thus, with the collapse of the dot-coms, the IT sphere, one might say, was cleared of dishonest businessmen and the network business began its second life in 2004, which continues to this day.
Morgan Stanley compares the fall of Bitcoin and the deflation of the dot-com bubble
Of course, it’s wildly funny to compare the bubble, which reached 6.7 trillion dollars (without taking into account inflation) and the crypto market, which barely reached 800 billion and sharply dropped to a measly 300. Especially considering that in crypto there are no such concepts as dividends, audits and balance sheets .
Let's put all this aside and look at how many percent the index fell in 2000. On Tradingview this is quite easy to do by opening a short position on the chart. We get ~78.4%. Yeah, and the fall lasted 3 years (see chart).
The crypto market capitalization has already fallen by more than 67% , and the flagship of the crypto world is on 70% , and for only TWO MONTH, which cannot be compared with 3 years of fall Nasdaq.
Even if you close your eyes to the fact that Bitcoin is good money according to Gresham’s law, discovered back in the century. The fact that they are much cheaper in transaction costs, belong only to you personally, are deflationary in nature, with the proper approach are completely anonymous and can be easily transported to anywhere in the world within a few minutes (Lightning will make it even more perfect in all respects), and so They also support the viability of one of the most revolutionary technologies that solves the problem of trust in finance and corruption...
And to call it a “BUBBLE”, then our “bubble” is already deep enough on all fronts to think about making purchases.
We fell almost as deep as the dot-com capitalization, but we did it 18 times faster!!! Actually, how we gained this height...
Based on the logic of those who like to compare Bitcoin with tulips and dot-coms, this year we will witness growth in the third and fourth quarter of 2018, even under the most pessimistic scenarios.
Now let's take a look at another part of the chart that traders of all sorts simply love to harp on: the fall of Bitcoin from 14 to 15.
Why is there no point in comparing that year with this year?
▪️Firstly, geeks were mainly involved in the market
▪️Secondly, then the only highly liquid exchange on which almost all crypto market participants traded, Mt.Gox, disappeared
That is, the smart money was not interested in the market, and if you look at the chart, large volumes came in during flat shooting from 15 to 16! Yes, yes, it was during a long, painful sideways movement, when the remnants of weak hands were shaken out of the market... then the smart money came in and reversed the trend.
Those who did not panic in those days, comparing the market with the schedule of the “new paradigm”, but made purchases, made +-10,000% in three years Hodl`a. So draw your conclusions.
Even if we repeat the scenario of 14-16 and drop by 5k, and then enter a flat for six months, the most idiotic decision would be to bury this market or, even worse, to sell off our crypto assets.
The name “Dotcom” stuck with young Internet companies of the 90s. This term is literally translated as follows: dot is translated from English as a dot, and com is the name of the Internet domain address, you get a transcription of the ending of the most popular name of the Internet address.com.
In the early 90s, there was a leap in computer technology, which in turn led to the emergence and rapid development of the Internet. Young companies began to appear in this industry and began to “do business” on the Internet. Many companies went to IPO (initial public offering of companies) and, accordingly, released their shares for free circulation on the stock exchange.
On the stock exchange, this also resulted in a boom of investor interest in such companies, which subsequently led to overheating of the entire stock market.
In this article we will look at several aspects of that stock market bubble:
what caused the industry to overheat, and many companies subsequently did not live up to their hopes;
how a far-sighted investor could have foreseen the inflation of such a significant bubble and what assets make sense to invest in at such moments;
We will also consider what analogues of the events of that time are developing in our market now and whether it is worth taking part in them.
Dotcom boom: reasons for the bubble formation
In the early 90s, the Internet became widespread and used. Internet companies began to appear at a very fast pace.
Like any new, innovative technology, Internet companies developed according to the principle of cyclical development of the industry. Here we can distinguish 3 main stages of development. The first stage is the stage of experimentation and formation of innovative technology. At this stage, the development and mastery of new, innovative technology is actively taking place. The first companies that begin to master this technology begin to actively expand and make a profit. This, in turn, gives rise to a wave of formation of new and new companies. No one yet fully understands the scale of the market, so new companies are appearing in almost unlimited quantities. This is the most difficult stage, at which it is most difficult to identify and highlight the company that will correctly apply the new technology, correctly build business processes and operate effectively.
The second stage of industry development is a sharp tightening of competition and a reduction in the number operating companies due to the fact that they simply cannot withstand competition within the industry and are gradually approaching the brink of bankruptcy. This is a stage of natural selection for all companies in the industry, which allows us to weed out truly effective companies, those who correctly use new innovative technologies and competently build business processes in the company.
The third stage is the stage of real formation and qualitative development of the industry. By this point, the industry had been “cleansed” by competition, as a result of which the most profitable and efficient companies remained. There are already many fewer of them than at the first and second stages of development, but these are already large and stable companies that steadily occupy their market share and which have a real and functioning business model.
These stages of development are characteristic of all new and innovative industries. And such cycles at one time could be tracked in different industries that went through the process from innovative technology to the formation of the industry as such. This is the automotive industry, television, then the development of personal computers, hard drives, and the microelectronics industry.
The Internet company industry has also gone through these development cycles. At its first stage, in the first half of the 90s, many companies arose that issued their shares and entered the stock exchange. Many investors did not even think about the essence of the activities of these companies and how they planned to make a profit; everyone was “intoxicated” by the magic of the new opportunities that the Internet promised. There was euphoria in the investment environment regarding the new technology and it seemed that it was enough to just create a website to make a profit in this market. During this period, such giants of the Internet industry as WorldCom, NorthPoint Communications, Global Crossing, JDS Uniphase, XO Communications, Covad Communications were created and seemingly flourished. At the same time, along with them, companies such as Amazon, E-Bay, and Google already existed. It was almost impossible to distinguish the former from the latter and understand which of them in 20 years will be the most capitalized brands on the planet.
As a result, investors paid widespread attention to any Internet company, regardless of whether it made a profit or what exactly it did on the Internet. All this led to a significant investment overheating of the market. The period from 1991 to 2000 was characterized by the active inflation of a bubble and a strong acceleration in company stock prices.
The Nasdaq Composite index of high-tech companies rose during this period from about 190 points to 4,750 points in 2000. The growth was about 2350%.
Wherein investment appraisal for many companies it was simply off the charts. P/E for many companies in the sector at that moment was more than 500 (you can read what the P/E ratio is in). This indicated that investors simply blindly and unreasonably believed that the profits of all Internet companies would simply grow at a multiple and non-stop pace in the future.
However, the problem with most companies was that these companies did not have a clear business model and business processes were not streamlined. And some had no intention of debugging anything! Receiving funds from the IPO, the new IT elite bought mansions and sports cars and felt like geniuses. Companies' expenses were constantly rising and their debt burden was growing. At the same time, there has been a lot of digging in this sector, and competition has intensified to the limit. Against this background, ineffective companies began to incur losses, which, coupled with a high debt load, brought these companies closer to inevitable bankruptcy.
Dotcom crash
In 2000, it became obvious that this entire industry was not earning as much profit as the market expected from them.
The active phase of the collapse of the investment bubble began with the bankruptcy of the largest Internet company at that time, WorldCom (the world's largest Internet access provider). Investors began to actively reconsider their views and positions regarding the prospects of the industry. The focus was on the current, not the future financial indicators companies that said that most companies are extremely inefficient and unprofitable.
As a result of a radical investment revaluation of the sector, stock quotes for Internet companies collapsed, and the bubble began to rapidly collapse. The NASDAQ index of high-tech companies fell by more than 83%. The market decline continued from 2000 to 2003.
The main problem with these companies was that the companies were owned and managed by programmers and IT specialists who were well versed in technology, but did not know how to run companies. Make sure everything works together like a well-coordinated mechanism and makes a profit.
However, after such a tough elimination in the competition, companies remained in the market that turned new technologies into certain consumer values for their clients. They haven't tried to grow their businesses, and many of them haven't gone public yet with an IPO. But these were companies that were already going through the stage of sustainable development. And at the moment, these are the well-known largest IT companies, such as Google, Yahoo, Amazon, E-bay. These companies became widely known and attractive to investors already at the stage of mature development, when the companies had clear business models and their internal processes were streamlined. Most of these companies went public after the dot-com bubble had deflated, which gave investors an understanding that these were companies that had a real business model, that they had a strong market share and were managed by professional managers. So Google went public in August 2004, Facebook went public in May 2012. But Amazon is the company that survived the boom during the investment bubble and was able to stay in the market and win the competition. Amazon went public with its IPO in May 1997.
This is precisely what characterizes the third phase of industry development, when there is a sharp decrease in the number of companies as a result of powerful competition. Just as, as a result of natural selection, only the fittest species remain in nature, only those companies that manage to create value for their consumers from new technology and who, at the same time, managed to build an effective business, remain in business.
It is this phase that is the most attractive from the point of view of investing in companies that have new technologies. Since at this stage the number of companies has decreased significantly, which has made it possible for these companies to retain market share more tightly, this means they have competitive advantages and they succeeded in creating value for their consumers. On the other hand, these companies are no longer overvalued by the market and investors do not have overly inflated expectations for the profits of these companies. But the most important thing is that, having survived the competition, these companies have already learned to extract value from new, untested technology for their consumers, and have also learned how to effectively transform all this into profit.
Overheating of the IT industry
As already noted during the period of strong investor interest in new Internet technologies, investment valuations for many companies were extremely high. The investment P/E multiplier for many companies was more than 100 and this was the norm for the entire industry, and the average P/E for NASDAQ reached 175. Such an investment valuation was no longer adequate, even taking into account the fact that it was possible to assume multiple future growth rates for the industry.
The dot-com bubble was directly reflected in the global macroeconomic indicator, which allows one to see investment overheating of the market. This is a macroeconomic indicator of the ratio of market capitalization of companies across all stock markets world to world GDP.
On this indicator, in the period from 1997 to 2000, an imbalance could be observed when the market capitalization of companies began to exceed the size of GDP. This meant that the markets were beginning to be priced higher than the actual results that were being shown. real economy. This is acceptable when markets assume a reasonable future percentage of growth rates, but when the excess reaches one and a half times the excess or more, then this clearly indicates a clear investment bias. The reason for the shift in balance for this global indicator of overheating was precisely the sector of Internet companies.
Smart investors who use this indicator in their work initially saw that the market was entering a stage of overheating and could easily understand which sector was causing the overheating of the entire market as a whole. This meant that investing in this industry was extremely risky and one should stick to investing in defensive sectors that were not experiencing an overheating phase at that time. This is the sector of consumer market companies, healthcare companies, utilities, industrial sector and energy. It was precisely this investment strategy that famous investment gurus, including investment fund W. Buffett.
It is these principles of smart investing that we convey to our students as part of our full cycle of investment training courses “,” and we also teach how to build and work with the global indicator of market overheating “Market capitalization to GDP.”
Is there a bubble in the market now?
Innovative technologies constantly appear and disappear into various fields our lives, and this process takes place almost constantly over time general development technologies of our society. Therefore, you can almost always find an area of our activity where there is an active boom in innovative technologies and there we can observe the formation of bubbles, that is, inadequate market valuation this area.
At this moment in time, there is such an area, and it is in the financial industry, where we can observe all the clear signs of an innovative technology boom and the inflation of a bubble of inadequate market valuation. This is the cryptocurrency market, where until recently we saw all the clear signs of industry overheating and even talked about it several times.
Number of cryptocurrencies per Lately has grown significantly, with a variety of companies entering ICOs and issuing their own cryptocurrency. The use value of such currencies is unclear and highly questionable. In addition, the cryptocurrency market experienced a fairly rapid cycle of growth and capital inflows. All major cryptocurrencies have risen significantly, and for no reason at all.
The basis for the emergence of cryptocurrencies as such was the emergence of blockchain technology, which found its main application in cryptocurrency. But the industry has not yet created a sufficient level of customer value. And companies that issue cryptocurrency earn mainly only from the ICO itself (initial issue of currency), after which many companies are simply forgotten. At the moment, the cryptocurrency market is already more adequately assessed by investors; the first rush of endless currency growth has passed there, and many cryptocurrencies have significantly adjusted in price.
Thus, the main and most popular cryptocurrency Bitcoin adjusted its price by 70%.
However, this has not changed the global disposition of potential investment interest in such assets. Since the new blockchain technology still has not created the required level of consumer value, which would allow all these companies to naturally transform it into profit.
In our full cycle of investment training courses “School of Smart Investment” we teach and convey an approach based on internal analysis of assets and companies. Look at the numbers financial statements, and not succumb to the mood of the crowd and thoughtless euphoria or panic, what we call the “smart investing” approach. This allows you to invest with stable results and use only reliable, undervalued and truly investment-attractive assets. You can sign up for your first free lesson on smart investing using the link -
Happy investing!