Cryptocurrency prospect analysis on the example of dotcoms
In the late 1990s, there was a brisk growth in the value of shares of Internet companies. But in 2001, the stocks of these companies were worth ten times less. This event has gone down in history as the “Dotcom Bubble”.
This situation bears analogy to the development of cryptocurrencies and blockchain. Therefore, it is worth considering that many crypto projects will follow the “dotcom” example.
About the Dotcom
In the 1990s it was already clear that the Internet is a breakthrough technology that will change our future. Everyone talked about the dawn of the new economy, p2p communication and the revolution in business processes. It was a real technical revolution that exceeded all expectations. Unfortunately, a resounding flop was inevitable.
Walk in the shoes of an investor in the late 90s, when a lot of dotcom companies looked extremely attractive for investors. But one company, WebVan, seemed particularly trustworthy: it had both a strong team and powerful financial support. In 1999 WebVan raised $375 million, and soon its value reached $1.2 billion, with a price of $25 per share.
In July 2001, WebVan shares were worth 6 cents apiece.
The dotcom bubble was a financial bubble that had existed from 1995 until its peak in March 2000. The climax took place on March 10, 2000, when the NASDAQ Composite stock market index reached 5132.50. By October it had fallen 78% from its maximum.
The bubble was caused in the late 20th century by the Internet companies’ (mainly American) shares take-off as well as by a large number of new Internet companies’ uprise and some old companies reorientation to Internet-based businesses. Shares of companies offering to use the Internet to generate income soared in price unbelievably.
In the period from 2000 to 2002, dotcoms lost $5 trillion. The capitalization of the entire cryptocurrency market is currently estimated at $ 290 billion, which is 17 times less than the losses incurred from dotcoms. Only half of the dot-com startups stayed the course.
Even if we consider the peak values of the dotcom market and the maximum values of the cryptocurrency market for the end of 2017 the difference is still significant because the total capitalization of the entire crypto industry had reached only $840 billion whereas the one of dotcoms had reached $6.7 trillion.
The difference between the financial markets from the ones 20 years ago is enormous. And even taking into account the fact that there were no serious financial instruments for cryptocurrencies for the possibility of speculation on the course (such as: futures, options, ETFs and other instruments that were used in the stock market), the market grew simply due to supply and demand.
It’s just lately when large funds started to provide institutional investors and private foundations with the opportunity for trading in digital assets.
What Happened to Companies During the Crisis?
In the mid-1990s Internet did not constitute desired (sufficient) applied value. It was rather a buzzword, like a “blockchain” is nowadays. It was obviously something cool, but still little understood. One had only to include “.com” in the company name in order to conduct a successful IPO.
The events, which happened to the ICO market in 2018 and the IEO in 2019 reflect the situation of the “Dotcom Era” of the 1990s.
Along with this, we can recall the well-known schedule of the “life cycle of financial bubbles”, since many financial bubbles are almost alike over the past century.
The market turned to a recovery phase only after the onset of the bearish stage, when the interest in projects has passed and early investors are taking profits. It is a well-known fact that while any fall is rapid, market recovery may take several years.
What did the internet lack? It is not difficult to give the answer 30 years later — the lack of a user base.
The worst thing is that the fall caused the collapse of many dotcom companies. Now we know that Apple and Amazon are the largest companies in their industries, but in 2000 there was no significant difference between Apple and WebVan for investors.
Apple stocks crashed from $4.95 to $ 1.00 in just nine months.
However, if you look at the whole picture…
Yet, Apple’s drop was insignificant, when compared to the fall of Amazon shares, which fell 95% from their maximum.
The year before the crisis in 1999, Jeff Bezos became “The Person of the Year” and his photo was on the cover of Time Magazine. His company was considered to be one of the most profitable and was valued at $40 billion. During the crisis, Lehman Brothers (the largest investment bank) stated that Amazon could go bankrupt and its’ collapse was coming. The majority of companies declared bankruptcy. The crisis cleared the market of those who wanted quick money and shell companies. But a decade later Amazon was able to return to the previous price value demonstrating a good profit for their investors, thereby having experienced another financial crisis, the one that forced Lehman Brothers into bankruptcy.
A similar scenario is possible with cryptocurrency. A “crypto ICO” is just like a “dotcom IPO”. They invest tens of millions of dollars into the blockchain startups. And after all, most of them have not been tested in real ‘combat conditions’, nor have they encountered pressure and obstacles. But those companies that were able to attract a user base and create a product in demand may become the new Apple and Amazon in the future.
The Internet was destined to have a bright future, and judging by the experience of dotcoms, blockchains will have a similar fate. The blockchain appeared on the basis of the internet, and in terms of the range of profit and loss, it is able to outdo the older brother. At the same time, 6.7 trillion dot-com dollars will seem a trifle compared to the scale that the cryptocurrency market is really capable to achieve. During the dotcom era, investors had far fewer opportunities than they have now. The goal is to resist the desire of making “easy money” and do not invest in dubious projects. Indeed, judging by the example of the dotcoms one can trace the fact that only those companies that have a working product and a business model capable of generating profit will survive.