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How Irrational Exuberance Aligned Dot-Com and Crypto Bubbles.
Intro
According to a popular viewpoint, nearly all markets go through the points of a bubble. However, not all bubbles are equal. Some of them tend to get more attention than others causing a line of related and unrelated events.
Just for a perspective, at some point of their development, the following stocks had a significant drop in value: GOPRO (GoPro): -95%, FIT (FitBit): -92%; LC (LendingClub): -91%; SNAP (most known as a creator of Snapchat): -83%; ZNGA (Zynga): -77%; TWTR (Twitter): -63%; SPOT (Spotify): -48%; DOCU (Docusign): -45%; FB (Facebook): -42%.
Perhaps the most conspicuous analogy of an infamous crypto crash is the dot-com bubble. Crypto market cap fell by 80% to its high, while Nasdaq Composite Index’s fell by 78% during the dot-com crash. Other similarities include explosive growth and grandiose expectations of the capabilities of underlying technologies.
Does this mean that crypto market is following the pattern of the dot-com bubble?
Indeed, the dot-com bubble and the hypothetical crypto bubble share many striking
Introduction
Dot-com
In the early 1990s, the internet was fast emerging. In mid-1990s a rapid increase of the computer ownership by households from 15% to 35% and a sense of the “next big thing” incentivized the launch of internet-based companies met with significant injections of investment funds thanks to the low interest rates.
Crypto
In the early 2010s, bitcoin and its underlying technology blockchain were fast emerging. A few years later, increasing publicity and an emerging idea of a decentralized and free-of-the-government-involvement financial system facilitated the launch of many blockchain-based companies, which were met with significant injections of investment funds thanks to the economic stability in some countries and the lack of thereof in others. Many of these companies were started and cheer-led by those who believed in the new system as well as those who wanted to make a quick fortune.
Investment FOMO
Dot-com
Adding .com to a company’s name significantly increased the companies valuations. Most of these companies didn’t have profits. However, pure speculation and a lack of a robust fundamental basis led to their significant overvaluation and the interest of the investors sensing the ‘next big thing’.
Crypto
Added ‘crypto’ or ‘blockchain’ words to a company’s name significantly increased the companies’ valuations. Most of these companies didn’t have a product, robust business model or profits. However, pure speculation and a lack of a significant fundamental basis led to their significant overvaluation and the interest of the investors sensing the ‘next big thing’.
IPO and ICO
IPO: Dot-com
As the bubble grew, Investment banks got involved, profiting greatly from initial public offerings (IPO) and subsequently touting further investment.
ICO: Crypto
As the bubble grew, the coin issuance companies got involved, profiting greatly from initial coin offerings (ICO) that subsequently resulted in 8.7bn in total funding.
Peak
Dot-com
Many people were trading full time and investors were turning into millionaires overnight. Between 1995 and 2000 the Nasdaq composite stock market index rose 400% to an all-time reaching the value of over $6 trillion in March of 2000.
Crypto
Between 2016–2017 the price of bitcoin and many other coins kept rising, and by the end of 2017 the Bitcoin price rose to $19k. Many investors started trading full time and turning into millionaires overnight.
Bubble Burst
Dot-com
Expectations were set high, the market was too excited, while many of the dot-coms were unable to come up with sustainable business models which would help prove at least some correlation between companies valuations and the invested funds.
The dot-com bubble burst happened in March 2000, shortly after the Nasdaq index posted its high of 5048 points. This was followed by sell-offs of the stocks by large tech firms such as Intel, Dell, and Cisco causing a public panic.
Crypto
Expectations were set high, the market was too excited, while many of the blockchain companies were unable to develop sustainable business models which would help prove at least some correlation between companies valuations and the invested funds.
The crypto bubble burst in December 2017, shortly after the Bitcoin price surpassed ~$19k. This was the breaking point for selling off the bitcoin and other crypto holdings by many investors, causing even more panic.
Sequel
Dot-com
Within the 2-year period after the burst, the Nasdaq composite dropped from 5048.62 points to 1114.11 points, equal to 77% and a disappeared $5 trillion worth of investments.
Hundreds of companies liquidated what little capital they had left, and closed by 2004. 48% of companies managed to continue their operations. Some of those that managed to stay afloat eventually surpassed their original market caps. Among those are Amazon and Google.
Crypto
Hundreds of companies liquidated what little capital they had left, and closed by 2004. Only some of the companies managed to continue their operations. Some of them were met with regulatory accusations.
Companies that managed to stay afloat could potentially surpass their original market caps. New players are entering the industry.
What’s common: dot-com & Crypto
According to Morgan Stanley report, cryptocurrency price chart and Nasdaq index chart indeed correlate.
During both of these historical events, the eagerness to make quick monetary rewards and theexcitement for new disruptive technology fuelled a FOMO (fear of missing out)-based investments and eventual high drops by 80%.
Post-Bubble
Dot-com
In December 1999, Amazon‘s stock price hit its first and the only one for the upcoming decade, peak of $107, followed by a massive drop of ~90% to ~$6 in about a year. It took almost a decade to reach its previous highs. Today, AMZN’s price is at $1,950, which is 32000% growth from its lows $6.
Crypto
Following the crash and till now, the hype has fallen down and speculation got to the normal levels. Meanwhile, the companies are developing the technology, launching new products while regulators are working out the regulatory mechanisms of the industry which all leads to the slow but sure adoption and more advancements.
A crypto market leader Bitcoin (BTC) is currently trading at just over $5,000, down -75% from its all-time high of around $19,665 in December 2017.
We can go ahead and draw a straight parallel line between the performance of these market leaders and predict an astonishing future for Bitcoin. Assuming we take the lowest point after all highs at $3,288.45, the AMZN’s ~32000% growth would take us to around $1,052,304 per Bitcoin.
Regardless of how realistic this price point is, this dot-com comparison offers a point of view that we should consider.
However, it is important to note that blindly comparing the price of one of the dot-com market leaders to Bitcoin would be immature.
Is it Even Important?
While this comparison offers an interesting and a potentially possible point of view on the future of Bitcoin and the blockchain industry, it is clear that the output of any endeavor, be it new technology, a new type of a currency or a completely new industry, and its value have to eventually align. Among success factors are efficiency/ technological robustness, market adoption, network effects, the scale of its impact on economies and industries, team, and a community.
The scope of a provided value will determine Amazons and Googles of the blockchain industry. In the meantime, while Bitcoin is going through continuous improvements, we may very well see a new market player entering the gameboard with the only desire to get the crown.
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How Irrational Exuberance aligned Dot-Com and Crypto bubbles. was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.