Will Crypto Learn The Lessons of Dot-com Bubble?
There are still debates on the nature of the crisis, 2018 marked the biggest sell-off in the cryptocurrency industry. The unparalleled bitcoin boom of 2017, was accompanied by the 65 percent crash in January and February of 2018. This event shortly stimulated other cryptocurrencies, but they soon followed the bitcoin. Overall, the cryptocurrency market capitalization lost 700 billion dollars since the peak in January, which accounts for 80% collapse. This massive meltdown invoked parallels with another extensive crash — the Dot-com bubble with the 78% collapse. While there is certainly a resemblance between the two market crashes, they are fundamentally different. Let’s take a closer look and discuss what can we learn from the past bubbles, and can they guide our actions in the cryptocurrency market?
The Nature of the Technological Bubble
First, let’s sort out the normative side of the argument. The definition of the bubble goes as follows: “trade in an asset at a price range that strongly exceeds the asset’s intrinsic value”.
They are two key factors to understand the nature of the technology bubble: application and speculation. Experts and investors speculate on what application the asset will have, frequently mismatching its actual application. The largest bubbles happen when the potential of application is ground-breaking. The bigger the potential impact of the new technology, the bigger the speculation. The introduction of the new revolutionary food supplement probably wouldn’t cause a bubble. The scope of application of this invention is limited to a narrow sector of food and pharmaceutical industry. Thus, the transformational potential of this technology only affects a small fraction of the world economy and won’t cause significant speculations.
In contrast, technologies like the Internet and blockchain have applications across various industries and fields and present a massive field for speculation. Internet altered almost revolutionized nearly every industry in existence and threatened existing corporate infrastructure and established practices. The Internet fundamentally changed advertising, media, retail, and this list can go on and on. Similarly, the blockchain, or to be more exact distributed ledger technologies, have an even greater potential to transform finance, banking, Internet-of-Things, and even contractual law, healthcare and logistics.
This potential is widely acknowledged and embraced by corporations and international institutions. Nevertheless, the application of this technology is sporadic and slow, and that creates conditions for a large bubble.
The Life Cycle of the Bubble
There are three main prerequisites for the bubble: a promising technology or asset, very limited present application, and as a result an asset with no or very little underlying value. According to the economist Hyman P. Minsky, there are five steps of the bubble:
Displacement. It happens when investors get fascinated by the new paradigm,- application of the emerging technologies.
Boom. Prices start to rise slowly in response to displacement. Gradually prices gain momentum as more and more investors are entering the market. Throughout this phase, the promising asset or technology draws wide media coverage.
Euphoria. At this stage, investors forget about caution and prices skyrocket. The application implementation rises dramatically. Valuations approach absolute levels throughout this phase. Enthusiasm is limitless. The speculation exceeds any plausible application.
Profit Taking. During this period disruption halts, as the adoption faces challenges. Simultaneously, smart investors are cashing out and taking profits. Nevertheless, it is extremely difficult to estimate when the bubble is due to collapse.
Panic. In this stage, asset prices change course and drop as rapidly as they had risen.
The Bubble pops and market correction happens.
As a result, a new promising asset becomes essentially undervalued. It usually remains there for months, until strongest companies start to lead the market upward.
Bubbles is not a stop sign for the industry investors, it is a natural course of events for every disruptive market technology. Real Estate, banking, and even New York Stock Exchange habitually undergo bubbles, when market overvalued reality. They are not necessarily as dramatic as a crypto crush, but the underlying mechanism of the application is failing to meet the expectations set by the blatant speculation. The cryptocurrency was definitely a speculative bubble. The real question here is how does it compare to another bubble, what we can learn from it. The bubble that most closely resembles crypto is the dot-com bubble.
Dot-com Bubble emerged in the late 1990s and subsequently crashed in 2001–2002. By the 21 century, it was obvious that the Internet was going to transform the world. It began to disrupt every industry and foster a new economy. The investors were fascinated by the promise of peer-to-peer connections and a new way of conducting business without intermediaries. Internet was regarded as the most meaningful and transformational event since the Industrial Revolution or even greater. Does it sound familiar to you?
In 1999, things looked bright — 6 biggest internet giants were valued at $1.65 trillion. They accounted for the 20% of US GDP. Various online businesses raised record-breaking sums during the IPO, and yet in two years most of them vanished. Cumulatively, almost $5 trillion was wasted between 2000 and 2002. Only a half of dot-coms survived the burst.
How did it happen?
In the modern day of universal connectivity and flawless online experience, it is difficult to conceive that in the early 2000s internet services and various applications had trouble cultivating a web of users. However, at that time, the internet had only minimal application. Nevertheless, company.com’s started to spring up everywhere. Placing “dot-com” in your enterprise immediately attracted a lot of media attention and was enough to land you a multi-million IPO.
Pets.com, Geocities, Webvan, Boo.com, and Kozmo- the dot-com hopefuls vanished within days. They were stars that burned too bright and burned out. While the application was limited the speculation grew too fast. It outgrew its primary value: the users. The majority of products had a minimal target audience and were unfit for the limited emerging market. The market became oversaturated; speculation led to the overvaluation. Companies lavishly spent on offices and bombastic PR stunts, while neglecting to budget for the long-haul.
Sadly, not only the poorly managed companies suffered. The whole industry plummeted. The storm devastated everybody: Apple stocks were demolished, NASDAQ suffered 70% loss; Amazon stocks plunged.
Apple stocks fell during the fall from a high of $4.95 to $1.00 a year later. Amazon dropped even more drastically, from $85.06 per share in 1999 to $5.97 by 2001. Even the standard-barriers of the industry are not immune from the market correction.
Contrast and Compare
Dot-com/cryptocurrency comparison is a common trope in the “bubble discussion”. Both crushes are caused by promising novel technologies that are tough to evaluate. Both of them are bubbles caused by the rampant speculation and limited application. Nevertheless, the world economy significantly changed since 2000, and the old rules of the game do not apply anymore. Hence, we cannot use the dot-com as a viable metric for cryptocurrency assessment.
The crypto-market is much more volatile. One of the biggest losers of the dot-com crash Webvan that lost $700 million in a day even remotely doesn’t resemble the doomsday of Ripple that lost $25 billion on January 8 of 2018
These fluctuations are strongly influenced by the following factors:
- the unprecedented access of all groups of investors to cryptocurrency
- the widespread availability of information online.
This foster a fertile ground for cryptocurrency volatility. Moreover, the amalgam of exchanges centralized and decentralized are poorly regulated and permit biased arbitrage and market speculations. The policy framework for crypto-industry is far from perfect and leave loopholes for market speculation and insider trading in the blockchain space. The lack of transparency and accountability, hinder the proper due diligence from the investor.
For instance, large investors can easily manipulate the price of the coin with $3 million market capitalization with just $50k 24h volume. The small-time investors would not be able to tell if it is a natural course of the market or a manipulation.
Another profound difference is the character of the investor. During the dot-com bubble, the investment was accessible only to the seasoned institutional investors: brokers, agents, funds. In contrast, in cryptocurrency, anyone can participate. The only thing you need is a device connected to the internet. That brings us to another important distinction, the geographical scope. The dot-com craze was mostly underpinned by the North American investors, while the crypto industry is lavishly sponsored from all over the world.
Another important update is the 24/7 news cycle. Investors are instantaneously receiving updates regarding any noticeable price fluctuations and make corresponding changes to their portfolios. Online news outlets provide news and market updates at speed inconceivable before the internet. In the same, time those resources lack oversight and frequently don’t use credible sources, or even participate in the outright manipulations. In the same-time amateur investors, lacks basic economic knowledge and understanding of the technology and therefore highly susceptible to panic sales and quick purchases. The dominant sentiment is the fear of missing out. That creates an ideal environment for massive run-ups and huge crashes that overshadow the dot-com bubble.
On the other hand, the world is far from embracing the full potential of the distributed ledger systems. The primary focus of the media attention was bitcoin. It was considered a standard-barrier and an indicator of health for the whole industry. In the same time, the Bitcoin’s value is insubstantial. It рфы expensive and slow transactionю Consequently, Bitcoin lacks application and without application, the Bitcoin’s value depends on speculation- a perception of its value. The media focus was initially skewed towards bitcoin- a purely speculative asset. The true massive application of blockchain is way ahead. In the meantime, cryptocurrencies will go through periods of massive volatility.
Reasons for Optimism
While the comparison with the dot-com bubble might look pretty grim for the crypto-enthusiasm, it contained some inspirational insights. Although many tech stocks never recovered the prices facilitated by the bubble, many surpassed their previous growth.
A notorious example of this long-term recovery is Amazon. This online retailer witnessed its stock price top in late 1999 at $113. It took Amazon 10 years to recover to that stock value. In October of 2009 Amazon surpassed that value. Furthermore, today Amazon shares are worth more than $1,500, demonstrating a post-bubble gain of more than ten times.
Another illustration of the long-term recovery is the software platform Oracle. Its stock price peaked around 2000 at $46.47. The Dot-com devastated Oracle market positions, putting it at $7.25 in July of 2002. Yet, the stock eventually regained its price peak in December 2014, after 14 years of recovery.
IBM can also teach us a good lesson. It peaked in 1999 at a value of $139.19 and then plummeted into a prolonged period of decay. Still, IBM recovered its previous value 9 years later and recorded a new height in March 2013, reaching $215.90. In the long run, companies that had a real application in their product and goal oriented teams managed to regain momentum and reach new heights, but it took them almost a decade. This observation gives crypto-community hope, that pragmatic teams with articulate vision and industry-specific application, like Rentberry, will come out stronger out of this crisis.
Crypto community should embrace the lesson of the dot-com bubble, develop internal regulations, focus on real application, and withdraw from speculative assets. Taking into account the profound shift in the information distribution, investment infrastructure and worldwide scale the recovery can happen much faster.