The dotcom bubble of the 2000s: causes, consequences, comparison with cryptocurrencies
Any areas related to IT technologies are considered as the most promising investments. Among other things, investors highlight dot-coms, which are intensively developing and whose shares are traded on the exchange of high-tech companies. The dotcom bubble began its formation back in 1995. And in 2000-2001, the powerful global dotcom crisis significantly shook the market. A large number of investors suffered major losses, thousands of Internet companies went bankrupt. For several more years, the market continued to fall, and only 4 years later a reversal was recorded. There are opinions that cryptocurrencies can repeat this experience.
What is called a dotcom bubble
Dotcom literally means “dot com” in English, which indicates a connection with IT technologies. Dot-coms are understood to be all Internet companies. Of the most striking examples is possible to allocate Facebook, Google, Yahoo, Yandex, Vkontakte.
Interest in dot-coms has appeared not now, but approximately since the mid-90s of the last century, when the online commerce market was born against the background of another technological revolution. The company’s own website meant that it was keeping up with the times.
The Internet, closely intertwined with business, has generated new trends in the field of investment. In order to attract capital, Internet companies have begun to conduct IPO – initial public offering of shares on the stock market. And since the first days of the IPO, interest in dot-coms has grown many times. The value of the shares of individual companies increased by 50 and even 100 percent, which allowed traders to acquire huge profits.
At some point, dot-coms accounted for up to half of all stock market placements. This is how the dot-com bubble appeared, which, like a soap bubble, grew with each subsequent year.
In what period of time was the dotcom bubble
The origins of the inflating of the financial bubble go back to 1995, when Internet companies began to appear en masse, most of which were Internet sites. Numerous articles in the press trumpeting the coming economic revolution contributed to the inflating of the bubble in many ways.
Over the next 6 years, the Nasdaq stock index grew rapidly and eventually increased 250 times. Novice and experienced investors bought everything without delving into the subtleties of the IT sector of the economy and without paying attention to the fundamental performance indicators of companies.
The culmination of the dot-com bubble came on March 10, 2000. On this day, the Nasdaq index reached 5,132 points, followed by a collapse. A period of prolonged decline in the value of shares and, as a consequence, the bankruptcy of many companies began.
Large investors also failed to avoid significant losses. So, if you believe the rumors, the losses of J.Soros amounted to $ 3.5 billion.
The dot-com crisis: causes and prerequisites for the emergence of a bubble
Of course, the emergence of a new economy can be called a prerequisite for inflating the dot-com bubble. Bill Gates also said that the absence of business on the Internet means no business at all. All this has generated a demand for IT technologies, including the Internet and devices for accessing the World Wide Web.
The causes of the appearance and growth of the bubble are the following:
- The state of market euphoria caused by blind faith in the new economy, which provoked an unprecedented demand for shares of Internet companies, as well as an unprecedented and sometimes unjustified increase in their capitalization.
- Unrestrained acquisition of shares at any price, based on the desire of the population to get easy money, supported by large-scale PR.
- Irrational use of capital by the dot-coms themselves, who often spent more on their own advertising than on development.
- Artificial acceleration of stock prices by a large number of speculators, as well as direct impact on the market of large players such as hedge funds, banks, brokers.
- Simplification of the exchange trading procedure, as a result of which it became possible to trade online and access to up-to-date information was opened.
The dot -com collapse
The external reason for the collapse of the dot-com bubble in 2000, experts call the recession in Japan, which caused a massive sale of shares of IT companies. The following are indicated as internal reasons:
- Fed’s key rate hike;
- reduced liquidity;
- sale of own shares by technology companies, which led to the sale of shares by investors;
- the desire of investors to lock in profits and partially sell previously acquired assets.
Perhaps all of these reasons in the complex contributed to the collapse of dot-com. However, there is another opinion: investors who invested in companies have finally realized that, instead of developing and making a profit, they simply spend capital.
Consequences of the dot-com crisis
Such a rapid, more than 50% drop in the Nasdaq index could not but affect the market situation and the activities of IT companies. The latter were left without funds, and not only those whose business was based on noisy advertising and the number of clicks suffered, but also serious companies that really develop and promote new technologies.
Ordinary and large investors also lost in this battle, as they suffered huge losses due to the fall in quotations. The situation of the half-ruined players was aggravated by the disclosure of the facts of abuse and fraud, for which financial sanctions were applied against some of them. So, banks Merrill Lynch and CitiGroup have paid heavy fines. Accusations also rained down in the direction of dotcom directors.
It is impossible not to mention such consequences of the burst bubble as the emergence of the longest bearish trend in the stock market and the reduction of the Fed’s key rate.
Comparison of dot-coms and cryptocurrencies
Given the trend of the cryptocurrency market to sharp ups and downs, many compare the digital currency sector with the dotcom sector. For example, the process of rapid growth in the value of cryptocurrencies in 2017 and an equally rapid decline in 2018 is in many ways similar to the inflating and collapse of the dot-com bubble.
And that’s what this similarity is:
- the expectation of a digital revolution and, as a result, an unprecedented profit from investing in cryptocurrencies;
- the presence of the lost profit syndrome (FOMO), provoking a stir in the cryptocurrency market, when investors and traders buy everything in a row;
- an increase in the volume of placement of new cryptocurrencies (ICO) by analogy with an IPO;
- unjustified increase in the value of currencies (often due to aggressive PR campaigns).
The similarity of the cryptocurrency market with the dotcom market is also seen in the fact that only a part of IT companies and only large and reliable cryptocurrencies have a future. Both are able to withstand the onslaught of competition, as well as in protracted periods of general decline. Otherwise, these are two completely different, although interrelated spheres, the development of which largely determines the geopolitics and policies of individual countries.
Published: 20 June, 2022