In less than 20 years' time, the Internet has immeasurably changed the lives of all of us. Both start-ups and established companies have made many millions off of the Internet, and many more hope to (and will continue to do) the same.
However, investors' overly-optimistic and inflated expectations of the Internet created the infamous dot.com bubble of the late 90s/early 2000s. History now appears almost doomed to repeat with the blockchain/cryptocurrency hysteria.
Dot.com for Dummies
During the late 1990s, the Internet fostered a euphoric attitude towards business and inspired huge hopes for the future, namely in online commerce. Riding this wave, countless Internet companies (known as dot.coms) were launched. Layman investors assumed that any company associated with the Internet was going to be worth millions and billions.
Inevitably, most dot.coms were not a roaring success - and even those that were successful were obscenely overvalued and suffered huge crashes themselves. The share price of Amazon (an oft-cited success story "rebuttal" by blockchain-enthusiasts to any suggestion that blockchain is in a dot.com-esque bubble and people are doomed to suffer huge losses), went from a high of over $100 in 2000 to a low of $5.51 that same year, corresponding to over a 94% plummet in value.
Holistically, in the late 1990s, the expectations by society of what the Internet could offer were simply unrealistic. Similar to the current craze, hysteria ensued with investors enamored with dreams of becoming "dot.com millionaires" (sound familiar?) Many investors were inspired by companies such as Amazon and eBay. Of course, for every company that experienced monstrous inflations in share price (and only went on to succeed many years later), hundreds of others failed miserably.
Summarily, investors foolishly ignored fundamental rules for investment - such as analysing P/E ratios, studying market trends, and reviewing business plans. Instead, investors and entrepreneurs became preoccupied with new ideas that were not yet proven to have market potential. At the height of the dot.com bubble, the tech-heavy Nasdaq index had a price-to-earnings ratio of 175. In the past year, bitcoin has generated transaction fees of nearly $219 million. And at $15.3k a piece, the total value of all bitcoin (its market cap) now tops $258 billion. That gives bitcoin roughly the equivalent of a trailing P/E ratio of over 1000. That means based on valuation, bitcoin is almost six times more expensive than dot.com stocks were at the height of their bubble.
I should acknowledge though that valuation is not what pops bubbles - supply does. Dot.com, like other bubbles, was driven by the fact that there were relatively few publicly traded Internet stocks in the mid-1990s, just as investors were getting excited about them. So prices of the stocks that were public then soared. Companies that had nothing to do with the Internet business added ".com" or ".net" to their names, or announced they were "looking into a web strategy" (sound familiar?), and those stocks then skyrocketed as well. But from 1997 to 2000, there were over $40 billion in dot.com IPOs. Eventually the supply of dot.com companies became large and dubious enough that the bubble burst and the hot air holding up all the stocks rushed out.
Further, dot.com investors ignored countless signs that the bubble was about to burst, often dismissing contrary views with statements such as "we are entering into a new economy", "this is the new world" and "you can't value these like other investments" (again, sound familiar?) Worryingly, blockchain is shaping up to be a whole lot worse - this time, the market is flooded with people who have never invested in anything who are suddenly all-in on cryptocurrencies and any company that blurts the word "blockchain".
Summary
Whenever we see a new technology (such as the Internet, or now blockchain) it almost always invariably creates a bubble. Whilst it is easy to get caught up in the "crypto-trend" hysteria, remember past mistakes, and realise that the potential to lose money by investing in a bubble still exists. For completeness, the global market cap for cryptocurrencies is now approaching US$760 billion. It's foolish to suggest any losses can be avoided by "just selling at the top" and pointing to graphs in hindsight. That is of course, unless you're accomplished at crystal ball-gazing.
There is nothing wrong with investing in blockchain companies. But please, approach them as you would any other investment - with an eye on relevant financial metrics and reasonable expectations, instead of just the 'surrounding buzz'. Don't bet the house, and be prepared to lose everything.
Personally, I will be suffering from a significant case of joy of missing out (JOMO) when this madness collapses over the coming months (or possibly even weeks - who knows?)
FGF Price at posting:
3.3¢ Sentiment: Sell Disclosure: Not Held
