Elvina Kamalova

How Irrational Exuberance aligned Dot-Com and Crypto bubbles.

Intro

Nearly all markets at some point go through a bubble. But not all bubbles are the same, and some of them tend to get more attention due to various events, hype or the level of a potential impact on the global economy.
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 similarities.

Introduction

Dot-com

In the early 1990s, the internet was fast emerging and by mid-1990s a rapid increase in the households computer ownership rose from 15% to 35%. The sense of the “next big thing” incentivized the launch of internet-based companies met with significant injections of investments 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, a rush to make a quick fortune, and the idea of a decentralized and free-of-the-government-involvement financial system incentivized the launch of many blockchain-based companies, met with significant injections of investments thanks to the economic stability in some countries and the lack of thereof in others.

Investment FOMO

Dot-com

Adding .com to a company’s name significantly increased the companies’ valuations. Most of these companies didn’t have profits, but 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

Adding ‘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 robust 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 resulted in 8.7bn in total funding.

Peak

Dot-com

Many people had started 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 and 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 to help them 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 2019. 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 the excitement for new disruptive technology fuelled a FOMO (fear of missing out)-based investments and the 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 and launching new products while regulators are working out the regulatory mechanisms of the industry. All these advancements lead to a slow but sure adoption.
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.
If we go ahead and draw a straight parallel line between the performance of these market leaders, we can predict an astonishing future for Bitcoin. Assuming we take the Bitcoin’s 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 This Important?

While this comparison offers an interesting and a potentially possible point of view on the future of Bitcoin and the blockchain industry, an output of any endeavor, be it new technology, a new type of 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 new market players entering the gameboard with the only desire to get the crown.


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Comments

August 2nd, 2019

“Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases, and bringing in a larger and larger class of investors who, despite doubts about the real value of an investment, are drawn to it partly by envy of others’ successes and partly through a gamblers’ excitement.” - https://en.wikipedia.org/wiki/Irrational_Exuberance_(book)

August 9th, 2019

“And everybody says YATTA!

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