Cryptocurrencies & the Dot-Com Bubble: Two Sides of the Same Coin? | by Zane Fleming | Sep, 2022

Eery (or hilarious) similarities between the 2021 cryptocurrency bull run and the Dot-Com bubble of 2000.

As the old saying goes, history doesn’t repeat itself, but it often rhymes.

At the beginning of 1995, the NASDAQ (launched in 1971 and weighted heavily towards the information technology sector) was at 750. As more and more households began acquiring personal computers to access the World Wide Web via web browsers, many entrepreneurs started taking advantage of venture capital to start dot-com companies. The NASDAQ later peaked in March of 2000 at around 5100 (a nearly 600% growth).

In 2020 and 2021, cryptocurrencies surged, led by Bitcoin and Ethereum. Hundreds and hundreds of new projects, dubbed ‘altcoins’, started using blockchain technology. The total market cap for all of cryptocurrency exploded from its local bottom of $93 billion towards the end of 2018 to $2.93 trillion at its peak in November of 2021 (a 3,000% growth).

During the dot-com bubble, investment banks were buzzed and venture capital was flowing freely. Any entrepreneur with a good idea and a basic understanding of the shiny, new world wide web could get a loan and be off to the races.

One major line of thinking was that the internet was a killer new app that would allow dot-com companies to bypass the distribution channels of existing businesses, and therefore not compete with them. (However, this proved to be spectacularly wrong once those larger, traditional businesses understood the sign of the times and adapted to create online presences as well.)

The dot-com bubble was also a remarkable period for personal investing. A large number of people at the time decided to quit their jobs to trade on the financial markets. Many media stories at the time started shifting the paradigm of expecting ever more returns out of trading stocks.

According to Wikipedia, “at the height of the boom, it was possible for a promising dot-com company to become a public company via an IPO and raise a substantial amount of money even if it had never made a profit — or, in some cases, realized any material revenue. People who received employee stock options became instant paper millionaires[…]”. During the Super Bowl of 2000, 17 dot-com companies bought ads in the hopes of going big, fast.

But in March of 2000, the bubble has popped, and proceeded to plunge 78%, with many online shopping companies declaring bankruptcy (anyone remember Pets.com, Webvan, or Boo.com?).

Bitcoin was created in 2009 as a response to the mismanagement of banks and rampant greed during the ’08 financial crisis, however cryptocurrency has a whole industry didn’t really take shape until 2015, when by then there were many more cryptocurrencies and blockchain projects in existence, as well as the creation of Ethereum, the second-largest cryptocurrency behind Bitcoin.

The crypto bull run of 2020 and 2021 (and it’s run-up in 2019) was a perfect storm. Sure, it seemed novel at the time, but bore striking similarities to the dot-com bubble. Yes, the conditions were perfect — a massive rise in personal investing and real-time stock trading through apps like Robinhood allowed anybody with a smartphone to dig in. And, the covid lockdowns of 2020 gave people an inordinate amount of time to research and invest in bitcoin and cryptoassets lured in by the thought of making unconventional profit.

Once again, a large number of personal investors tried their hands in the markets, some seriously, and some not-so-seriously (Dogecoin the meme coin was hyped to death and grew 20,000%). During the Super Bowl of 2021, 4 cryptocurrency exchanges ran ads.

Once again venture capital was flowing freely and blockchain projects exploded (there are now over 9,000 projects listed on CoinMarketCap). Web 2.0 was now becoming Web 3.0, and what was once laughed at by investment firms was now drawing them all in. BlockRock has partnerned with Coinbase to make it easier for institutional investors to manage and trade crypto. Grayscale has created several crypto ETFs. Bitcoin became official legal tender in El Salvador. In a big PR stint, Elon Musk even began accepting Bitcoin payment for Tesla’s for a brief period.

But by the end of 2021, the crypto bubble burst. Now, nearly a year later, the whole cryptocurrency market cap is down nearly 75%.

You might be laughing at yourself once you realize the many similarities of these bubbles. You might be thinking, Yikes, I got caught up in the crazed hype of a bubble again.

Indeed, if you recently lived through the crypto bubble, you might be disillusioned if you’re stuck underwater, or cynical even if you did sell judiciously to take profit.

But don’t be dismissive just yet.

Yes, risk management should always be top priority when considering any investment. And yes, you can’t argue with the peace of mind that comes with “set it and forget it”, sound, long-term investments. However, it’s important to realize the nature of these sorts of market bubbles.

If the technology and innovation behind them are sound, then these bubbles are like a super-charged growth spurts that contribute to the long-term evolution of the sector. With this in mind, yes there will be ups and downs, and with time, and after many mistakes, it is possible to develop sound judgments with regards to whether a market is overvalued or undervalued. Just remember to manage your risk appropriately and to not get caught up in all the noise.

Venture capitalist Fred Wilson, who funded many dot-com companies and lost 90% of his net worth when that bubble burst said this in his book:

A friend of mine has a great line. He says “Nothing important has ever been built without irrational exuberance.” Meaning that you need some of this mania to cause investors to open up their pocketbooks and finance the building of the railroads or the automobile or aerospace industry or whatever. And in this case, much of the capital invested was lost, but also much of it was invested in a very high throughput backbone for the Internet, and lots of software that works, and databases and server structure. All that stuff has allowed what we have today, which has changed all our lives… that’s what all this speculative mania built.