Dot-Com Bubble and Potential Modern Risks

by ifund · November 18, 2018

“The four most dangerous words in investing are: ‘This time it’s different.'”

– Sir John Templeton

The 1990s is a period associated with rapid technological progress and thus, a period of new areas and domains worth investing in. The Internet became a field where different startups started to grow and expand, attracting investors into this massive boat. However, a ship can’t hold an infinite amount of travelers without drowning, leading to one of the most known economic bubbles – The Dot-com Bubble.

The Dot-com bubble is a period of massive investment in companies with a “.com” in their names. It was known and grew due to a few factors: speculative investment, the failures of the internet-related companies to generate profit and a massive venture capital funding for startups. To understand it better, we should define the term of economic bubble:

“An economic bubble exists whenever the price of an asset that may be freely exchanged in a well-established market first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might reasonably be expected to be realized from owning or holding the asset.” – according to source.

According to Business Insider, taking into account the definition of an economic bubble, it can be concluded that the starting period for the Dot-com Bubble can be set at April 1997, and June 2003 as the end period of the bubble.

In this period, the NASDAQ index, which includes many internet-based companies, reached a peak of 5048 on March 10, 2000, almost double compared to the data from the same year. A panic selling had raised among investors due to massive sell orders placed by Dell and Cisco on their stocks. Notwithstanding the fact that in the next period the stock market lost 10% of its value, several internet-based companies became worthless after reaching market capitalization of hundreds of millions of dollars earlier. However, not all dotcom companies have failed. The period described earlier is known as the birth date for massive companies such as Amazon and Ebay, which were able to recover quickly. Cisco and Qualcomm were also able to survive after a big decline in their market capitalization.

The consequences of the Dot-com bubble are immense, a tremendously big amount of internet-based companies went bankrupt and closed by 2001 and trillions of dollars of investment capital have been lost.

The Dot-com bubble experience is very valuable, especially in the context of new potential bubbles. One of them is Blockchain, a technology which is acquiring attention at a fast pace.

Blockchain aims towards recording and distributing digital information without editing it. The technology gained its popularity together with the launch of Bitcoin in January 2009. The idea is that all the operations are strictly peer-to-peer, without the involvement of a third party, and the transactions are verified via a network of computers. Even though the data of the transaction is public, used data is on a certain level anonymous.

According to Investopedia, nowadays, this technology is starting to spread within cryptocurrencies to different sectors, such as banks, healthcare, voting, supply chains and others.

However, according to Reuters, Blockchain has some similarities with the infamous Dot-com bubble, and it relies on the name-grabbing. As it is depicted, the average share price of a company rises more than three times after adding “Blockchain” to its name, similarly to dotcom companies which added “.com” to theirs.

There is a well-seen pattern. Of course, we cannot be 100% sure that crypto and other blockchain related systems will end the same as “.com” companies. Unfortunately, history shows us that this is not the first time, when a bubble appeared, so every investor should be extremely careful with such investments. If before investing in a company a person had to analyze everything extremely carefully, then in the case of cryptocurrencies, the investor should pay tenfold more attention to details and still bear in mind that all his investments could vanish in a matter of weeks.

Authors: Vladislav Cernoutan, Dmitrijs Livinskis