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What can we learn from the internet bubble of the 90s on the crypto market?

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6 min read

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With the meteoric rise of cryptocurrencies, many observers are drawing a parallel between the current phenomenon and the Internet bubble of the late 1990s.

This comparison seems relevant in several respects, but it also raises many questions. This article aims to take stock of these similarities and differences, and to try to understand what we can learn from the crazy story of the dotcom bubble of the 90s.

Investor frenzy for new Internet-related companies

The Internet bubble, also called the "dotcom bubble," refers to a period of intense speculation in technology stocks in the late 1990s.

This bubble was fueled by the craze for new technologies and the Internet in particular, with investors ready to bet colossal sums on promising start-ups which turned out to be mostly unprofitable. It was then the golden age of Silicon Valley with the birth of the Internet companies that we all know today, namely Google, Amazon, Ebay, etc.

The explosion of Internet-related businesses was in full swing with the emergence of a multitude of entrepreneurs and investors ready to support them. When the bubble finally burst, between 2000 and 2002, many companies went bankrupt and investors lost billions of dollars.

The rise of cryptocurrencies: a similar phenomenon?

At first glance, it is tempting to draw a parallel between the Internet bubble and the cryptocurrency bubble. In both cases, there is intense speculation about a promising new technology that is still poorly understood by the general public. Moreover, just like the start-ups of the late 1990s, many blockchain and cryptocurrency companies are struggling to turn a profit despite astronomical investments and valuations.

Indeed, most crypto companies do not survive the bear cycle and most disappear into oblivion. As for those who try to maintain themselves, they seem to survive on the capital gains accumulated during bullish cycles.

Both sectors ended up being a combination of excessive speculation, disconnected valuations, lack of profitability and irrational enthusiasm.

What are the similarities between the two bubbles?

Several elements actually bring the two phenomena together:

Marked optimism for new technology : Much like the bursting of the internet bubble in the late 1990s, blockchain and cryptocurrencies represent a revolutionary technology that generates a lot of enthusiasm. This explains why investors are willing to take significant risks in the hope of participating in the birth of a new economic sector. They want to both participate in the development of this new technology and make a profitable investment.
A big speculation : In both cases, the price rise was largely fueled by speculation rather than strong economic fundamentals. Indeed, on closer inspection, most blockchain and cryptocurrency companies do not have a viable business model, which was also the case for many Internet bubble start-ups that went bankrupt. . The business models used by crypto companies very often operate on a model of Ponzi.
Volatility : Both bubbles are characterized by extreme volatility, with sometimes spectacular price movements over short periods. Startups during the dotcom bubble also experienced dramatic price movements, according to market and entrepreneur news. Concerning crypto-assets, these are also subject to volatility, and are also subject to new regulations which have an impact on the price of assets.

The differences between the two sectors

Despite these similarities, it would be imprudent not to also consider the major differences that exist between the two sectors.

The nature of the assets : Stocks of companies in the dotcom bubble were traditional financial assets (stocks) while cryptocurrencies are a new form of asset that doesn't quite fit into existing categories. Moreover, current regulations around the world can vary from one country to another and can also change within the same country. This was the case in the United States where the SEC finally ruled in 2023 that crypto assets should be considered “securities” except for Bitcoin which is considered a “commodity” (a raw material).
The difference in valuation: Cryptocurrency markets are much less regulated than traditional financial markets. Although many countries around the world This can contribute to price volatility and uncertainty surrounding the future of cryptocurrencies.

The irrationality of investors in a race for profit

If we compare the evolution of the two bubbles, we see that the cryptocurrency bubble seems to follow a similar pattern to that of the Internet bubble, but at an accelerated pace. Indeed, the cryptocurrency bubble reached its peak in just a few years while it took a decade for the Internet bubble to burst into the open.

This could be because information travels much more quickly today thanks to the Internet, which can accelerate market cycles. This is an explanation that is all the more likely as cryptocurrencies find a particularly strong response on social networks and with personalities who have a great influence on large communities of people.

In this regard, we remember the power that social networks can have, as was the case with the Wall Street Bets affair where we saw how apprentice traders were able to challenge the biggest hedge funds in New York.

In addition, it is also easier today to invest thanks to new fintech and financial companies which have popularized and made trading very easy, particularly on mobile.

The key takeaway is that in both cases, the bubble was fueled by enthusiastic investors willing to take significant risks in the hope of quick profits. In the cryptocurrency world, this type of investor is called "degens," a fitting description of their relentless pursuit of profit. This has created a specific mentality that disregards fundamentals and drives prices to unreasonable levels.

The cleaning up of the market after the bursting of the bubbles

Certainly, when the internet bubble burst, many companies saw their values melt rapidly, which resulted in a financial loss for investors. However, this ultimately led to a major correction in the financial markets. Better yet, this led to a maturation of the technology sector which made it possible to concentrate on the most solid and serious companies in the sector.

When the incredible bull run of 2021 came to an abrupt halt with the collapse of the Terra blockchain, a monstrous series of collapses and bankruptcies ensued in the crypto industry. Numerous companies closed, resulting in colossal losses for the vast majority of investors. However, this also proved beneficial for the sector as a whole.

History of the Bitcoin Bull Run: The origins and triggers

Read: 2022 was a difficult year, but in the end, it was a good thing…

What are the lessons to be learned?

In short, we can see many parallels between the crypto industry and the period of frenzy preceding the bursting of the internet bubble. Although the contexts and technologies are different, there are important lessons to be learned from both phenomena to avoid repeating past mistakes.

In both cases, investors were attracted by high potential returns without necessarily considering the underlying fundamentals. It is essential to understand the technologies and business models of companies or projects before investing. Cryptocurrencies and blockchain projects should be evaluated based on their actual utility, potential adoption and long-term viability.

The other factor to consider is misleading advertising and fads. Both the dot-com bubble and the cryptocurrency craze were fueled by excessive hype and promises of quick profits. Investors must be aware that promises that seem too good to be true are precisely that: "too good to be true," and nothing more. It's important to maintain a critical mindset and not get swept away by the surrounding excitement and the shilling of certain individuals.

Finally, excessive speculation played a major role in the bursting of the internet bubble, as well as in the extreme fluctuations in cryptocurrency prices. It is important to keep in mind that speculation can lead to irrational price movements and significant losses. It is important for cryptocurrency investors to diversify their investments to mitigate potential losses.

In short, the comparison between the internet bubble and cryptocurrencies reminds us to what extent we can become blind to the promise of profits...

Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.

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