Dot-com bubble

Dot-com bubble

Common

This story will differ from the usual format. Previously, we began to «approach the crisis long before the collapse»; we considered all the causes and consequences. This time everything is different. This event can hardly be called a crisis. It is rather an ordinary financial bubble, which subsequently burst. Why did we decide to learn it? Because the dotcom bubble is very similar to the situation that was on the cryptocurrency market in 2017. Do you remember this time? When every company that assigned the word blockchain to its name immediately grew by hundreds of percent. When each ICO gave tens or even hundreds of X. When there was a huge number of fraudulent projects that had one task – to cash in on the ignorance of investors. When the market grew by tens of percent per day and it seemed that nothing would stop it.


 

 

A little digress from the subject

 

Companies that want to attract financing through the sale of shares and become public must subsequently submit all financial statements. Investors who want to buy a share in the company (its shares) analyze these statements and based on it make a decision on the purchase of securities. Accordingly, we conclude that the price of stocks is the expectations of investors regarding the company’s future financial performance. If they improve from year to year, then prices will rise. This is an ideal pricing option. However, in practice, everything is different.

Investors are often driven not by common sense, but by emotions. They see a staggering increase in quotes and fear of missed opportunities. Therefore, in the markets and there are bubbles that always burst. The problem is that it is difficult to assess the current stage of pricing and say whether it is a bubble or not. A bubble is always determined ex post. After all, the price of stocks can rise by hundreds percent per year, and then never fall below.

 

 

How did the internet evolve?

 

Today, half the world’s population uses the Internet. Many cannot imagine life without it. Some have a fully built business in the net. There are such huge corporations as Google, Yandex, Facebook, Alibaba Group, whose business is wholly or mostly connected to the Internet. However, it was not always like that.

This is how the formation of the Internet looks:


 

As we can see, this technology became commercial in the 90s. People started watching news online, buying things online, chatting online. It was a revolutionary technology that foreshadowed a great future.

 

 

What is dotcom?

 

The term «dotcom» was used and is applied to companies whose work is completely tied to the Internet. Today, this term refers to the sites of companies that have an ill-conceived, inefficient and immature business model.

How did the bubble begin? Yes, you will not learn anything new. Just look at the chart:


 

This is the Nasdaq-100 Index – the top 100 companies traded on the Nasdaq Exchange. Data available since 1985. In principle, we can assume that from there the bubble began to develop. Gradual smooth growth, which subsequently went to a climax. From September 1998 to March 2000, the indicator grew by a little more than 400%, which is a lot by the standards of stock markets.

By the way, compare these two graphs:


 

Therefore, the bubble in the cryptocurrency market is compared with the dotcom bubble. The situation is almost identical:

•   A new revolutionary technology has appeared;
•   People run to buy stocks / tokens, being afraid not to «catch the departing train»;
•   The market is growing along a parabolic path;
•   Then everything falls and recovers for a very long time.

 

The only thing is the Nasdaq-100 chart for 15 years, and the Bitcoin chart for 3 years. In other words, events in the cryptocurrency market developed several times faster. By the way, the Nasdaq-100 subsequently broke its highs and has only been growing since then.


 

However, for this it needed 17 years. Is bitcoin waiting for the same fate?



 

In fact, the technology «Internet» is really revolutionary and it really changed the lives of people. The bubble was simply inflated, which subsequently burst. Similarly, with blockchain technology. It is also revolutionary and will also subsequently change the world, but how much time will it take?

 

 

Why did the dotcoms crash?

 

As always, the point is the greed of people.

•   Investors could not adequately assess the value of Internet companies, the value of their shares. After all, companies in fact didn`t own anything. They had several computers and a domain name. How can one evaluate such a company? Then they decided to evaluate the number of audiences and the time that the average person spends on the site.
•   There was no normal business model. At that time, the creation of the Internet company was mainly possible for programmers and IT geniuses, who didn`t understand anything in business, as well as in the art of selling goods, monetizing.
•   Too much money was spent on advertising. Moreover, advertising was aimed not at end consumers of products, but at potential investors.
•   There was a substitution of concepts. Doing business by using the Internet is only a tool for implementing a business process, but not an independent business process.
•   No one understood the essence of the Internet. On the Internet, completely different rules worked, which many didn`t understand.
•   There were stock price manipulations.
•   The Internet was still «very raw». People didn`t know how to monetize traffic.

 

 

Why no one could predict the bubble, if it is so obvious?

 

Today, it is really obvious looking at the chart. However, do you remember the 2017 cryptocurrency bubble? Do you remember the investors who bought bitcoin for 15 thousand, for 18 thousand? Who bought the air for $ 1000 + and still suffer significant losses? This is the greed of people, it is incurable. Time passes and everyone forgets the consequences of the bubble. Even Isaac Newton at one time lost money due to a bubble of campaigns in the southern seas. First, he recorded a profit of 100%, but then could not resist and entered the market higher.

Although at that time, of course, there were those who predicted an imminent fall. So, during the 1999 debate on the West Coast of the United States between Jim Glasman and Barton Biggs, comparisons of the current (at that time) situation with tulip fever were voiced, but this caused a misunderstanding among the audience. But some even thought that the speaker had problems with an adequate perception of reality – after all, the new technology creates a new economy in which the old laws no longer work. As it turned out, they work.

 

 

What consequences?

 

Again, there is nothing new. There were many layoffs, confidence in the IT sphere was lost. Thousands of companies went bankrupt (mainly in the USA). Only three of the many well-known companies survived: Amazon, eBay and Google. By the way, they all thrive today and are leaders in their segment.

Here are the data on the profitability of funds popular at that time:


 

As we can see, the numbers are somehow abnormal. 65%, 62%, 59%, by today’s standards this is a huge profitability. Although in 2000-2002 we see huge losses. RS Emerging Growth contributors lost 80% over 3 years, Morgan Stanley Capital Op about 85%, and Fidelity Aggressive Growth lost 87%. On average, investors wishing to join high-tech funds lost 34% each year. Thus, having entered even in 1997, they would not have earned anything. A satisfactory result was given only by the 1995-2005 segment.

Probably, Warren Buffett is the only one known investor who has not been hurt. In this case, his strategy «buy what you understand» has paid off. Although, he still for a long time refused to acquire technology companies and probably missed part of the potential profit. But we cannot criticize him.

 

 

The second wave of the dotcom bubble

 

It is likely that a second dotcom bubble is developing today. Internet companies are at the peak of popularity again, and their stocks are growing rapidly. Amazon, Google, Facebook – all of them show good results and are in demand among investors. Will this development end with another bubble? We don`t know, no one knows. However, talk about the growth of several hundred percent per year is not necessary yet. Probably, when we see such a development of events, then it will be possible to claim the presence of a bubble.

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This story will differ from the usual format. Previously, we began to «approach the crisis long before the collapse»; we considered all the causes and consequences. This time everything is different. This event can hardly be called a crisis. It is rather an ordinary financial bubble, which subsequently burst. Why did we decide to learn it? Because the dotcom bubble is very similar to the situation that was on the cryptocurrency market in 2017. Do you remember this time? When every company that assigned the word blockchain to its name immediately grew by hundreds of percent. When each ICO gave tens or even hundreds of X. When there was a huge number of fraudulent projects that had one task – to cash in on the ignorance of investors. When the market grew by tens of percent per day and it seemed that nothing would stop it.


 

 

A little digress from the subject

 

Companies that want to attract financing through the sale of shares and become public must subsequently submit all financial statements. Investors who want to buy a share in the company (its shares) analyze these statements and based on it make a decision on the purchase of securities. Accordingly, we conclude that the price of stocks is the expectations of investors regarding the company’s future financial performance. If they improve from year to year, then prices will rise. This is an ideal pricing option. However, in practice, everything is different.

Investors are often driven not by common sense, but by emotions. They see a staggering increase in quotes and fear of missed opportunities. Therefore, in the markets and there are bubbles that always burst. The problem is that it is difficult to assess the current stage of pricing and say whether it is a bubble or not. A bubble is always determined ex post. After all, the price of stocks can rise by hundreds percent per year, and then never fall below.

 

 

How did the internet evolve?

 

Today, half the world’s population uses the Internet. Many cannot imagine life without it. Some have a fully built business in the net. There are such huge corporations as Google, Yandex, Facebook, Alibaba Group, whose business is wholly or mostly connected to the Internet. However, it was not always like that.

This is how the formation of the Internet looks:


 

As we can see, this technology became commercial in the 90s. People started watching news online, buying things online, chatting online. It was a revolutionary technology that foreshadowed a great future.

 

 

What is dotcom?

 

The term «dotcom» was used and is applied to companies whose work is completely tied to the Internet. Today, this term refers to the sites of companies that have an ill-conceived, inefficient and immature business model.

How did the bubble begin? Yes, you will not learn anything new. Just look at the chart:


 

This is the Nasdaq-100 Index – the top 100 companies traded on the Nasdaq Exchange. Data available since 1985. In principle, we can assume that from there the bubble began to develop. Gradual smooth growth, which subsequently went to a climax. From September 1998 to March 2000, the indicator grew by a little more than 400%, which is a lot by the standards of stock markets.

By the way, compare these two graphs:


 

Therefore, the bubble in the cryptocurrency market is compared with the dotcom bubble. The situation is almost identical:

•   A new revolutionary technology has appeared;
•   People run to buy stocks / tokens, being afraid not to «catch the departing train»;
•   The market is growing along a parabolic path;
•   Then everything falls and recovers for a very long time.

 

The only thing is the Nasdaq-100 chart for 15 years, and the Bitcoin chart for 3 years. In other words, events in the cryptocurrency market developed several times faster. By the way, the Nasdaq-100 subsequently broke its highs and has only been growing since then.


 

However, for this it needed 17 years. Is bitcoin waiting for the same fate?



 

In fact, the technology «Internet» is really revolutionary and it really changed the lives of people. The bubble was simply inflated, which subsequently burst. Similarly, with blockchain technology. It is also revolutionary and will also subsequently change the world, but how much time will it take?

 

 

Why did the dotcoms crash?

 

As always, the point is the greed of people.

•   Investors could not adequately assess the value of Internet companies, the value of their shares. After all, companies in fact didn`t own anything. They had several computers and a domain name. How can one evaluate such a company? Then they decided to evaluate the number of audiences and the time that the average person spends on the site.
•   There was no normal business model. At that time, the creation of the Internet company was mainly possible for programmers and IT geniuses, who didn`t understand anything in business, as well as in the art of selling goods, monetizing.
•   Too much money was spent on advertising. Moreover, advertising was aimed not at end consumers of products, but at potential investors.
•   There was a substitution of concepts. Doing business by using the Internet is only a tool for implementing a business process, but not an independent business process.
•   No one understood the essence of the Internet. On the Internet, completely different rules worked, which many didn`t understand.
•   There were stock price manipulations.
•   The Internet was still «very raw». People didn`t know how to monetize traffic.

 

 

Why no one could predict the bubble, if it is so obvious?

 

Today, it is really obvious looking at the chart. However, do you remember the 2017 cryptocurrency bubble? Do you remember the investors who bought bitcoin for 15 thousand, for 18 thousand? Who bought the air for $ 1000 + and still suffer significant losses? This is the greed of people, it is incurable. Time passes and everyone forgets the consequences of the bubble. Even Isaac Newton at one time lost money due to a bubble of campaigns in the southern seas. First, he recorded a profit of 100%, but then could not resist and entered the market higher.

Although at that time, of course, there were those who predicted an imminent fall. So, during the 1999 debate on the West Coast of the United States between Jim Glasman and Barton Biggs, comparisons of the current (at that time) situation with tulip fever were voiced, but this caused a misunderstanding among the audience. But some even thought that the speaker had problems with an adequate perception of reality – after all, the new technology creates a new economy in which the old laws no longer work. As it turned out, they work.

 

 

What consequences?

 

Again, there is nothing new. There were many layoffs, confidence in the IT sphere was lost. Thousands of companies went bankrupt (mainly in the USA). Only three of the many well-known companies survived: Amazon, eBay and Google. By the way, they all thrive today and are leaders in their segment.

Here are the data on the profitability of funds popular at that time:


 

As we can see, the numbers are somehow abnormal. 65%, 62%, 59%, by today’s standards this is a huge profitability. Although in 2000-2002 we see huge losses. RS Emerging Growth contributors lost 80% over 3 years, Morgan Stanley Capital Op about 85%, and Fidelity Aggressive Growth lost 87%. On average, investors wishing to join high-tech funds lost 34% each year. Thus, having entered even in 1997, they would not have earned anything. A satisfactory result was given only by the 1995-2005 segment.

Probably, Warren Buffett is the only one known investor who has not been hurt. In this case, his strategy «buy what you understand» has paid off. Although, he still for a long time refused to acquire technology companies and probably missed part of the potential profit. But we cannot criticize him.

 

 

The second wave of the dotcom bubble

 

It is likely that a second dotcom bubble is developing today. Internet companies are at the peak of popularity again, and their stocks are growing rapidly. Amazon, Google, Facebook – all of them show good results and are in demand among investors. Will this development end with another bubble? We don`t know, no one knows. However, talk about the growth of several hundred percent per year is not necessary yet. Probably, when we see such a development of events, then it will be possible to claim the presence of a bubble.

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