Comparison: Cryptocurrency Markets and Internet Bubbles.
G.R. Krahmer
Some lessons from the past are important to remember when talking about today’s cryptocurrency market. The infamous Dotcom bubble that snapped in 2000 is undoubtedly one of those lessons. You may be thinking. What does the dotcom crash have to do with the crypto market?
Well, very simple: Bubbles or soap bubbles are a guarantee when it comes to new technology. And that’s a fact, at least if you look at recent history. People like, among others, Warren Buffett,
George Soros to Nobel laureate Robert Shiller have all made a direct reference stating that Bitcoin is a bubble that seems destined to burst. In addition, many skeptics of the digital revolution argue that the red flags the industry is currently facing have strong similarities to the Dotcom bubble.
PLEASE NOTE: Investing involves risks. You may lose your investment.
The Dot Com Bubble
The Dotcom bubble, also called the Tech bubble or the Internet bubble, was one economic bubble that took place approximately from 1997 to 2002. During this period, many internet companies (dotcoms) were founded, many of which failed. Let’s take a quick look at the year 1997 and the beginning of this infamous Dotcom bubble with the IPO of Amazon.com.
At the IPO, initial public offering, Amazon shares were offered for $18 each, and at the end of the first day, the value of one Amazon share was already $23.50, an increase of just over 30% in one day. Many other internet companies also went public, and the investment frenzy had begun.
Money was pouring in from all sides, and it seemed like this trend would never end. And yet it did. In the years leading up to the bubble, interest rates were lower than they had ever been. In combination with the adoption of the internet by companies and consumers and growing interest in tech companies, people started to invest en masse (big time). A period of enormous growth emerged that was characterized by excessive speculation on internet-based businesses. Mainly startups without any track record of success.
In either case, I want to have a little bit of exposure to the crypto market.
Firstly, I want diversification, so in addition to cryptos, it is wise to hold multiple asset classes. In addition, I want to leave I use multiple cryptos at the same time, and I don’t feel like researching all kinds of individual crypto coins. As we always advocate for index funds, this principle also applies when buying crypto.
“Buying a broadly diversified index fund, or ETF, gives 99% of people the best chance of a good return.”
Crypto ETF’s and indexes are currently being offered in more and more places. Most crypto ETFs that are for sale at most brokers today often contain only a handful of cryptos. That in itself can be an excellent choice, but personally, I prefer a somewhat broader spread.
What is the Comparison with the Cryptocurrency Market?
We see a lot of similarities with the Dotcom bubble, and trends seem to repeat themselves every time a new type of technology comes onto the market. The dot-com companies of the time often made promises to “change the world,” something you also see in many crypto projects.
The same applies to the arrival of the blockchain and the cryptocurrency boom in 2017. The blockchain revolution started with the adoption of Bitcoin and is a lot like the Dotcom bubble. While you cannot deny that the signs of a bubble are present, the counterargument is that cryptos are far from reaching their peak and that the industry is on the verge of a major economic overhaul; in other words, a digital revolution.
It’s important to mention that, despite the fact that the vast majority of Dotcom shares no longer exist, you only have to look at companies like Amazon and eBay to understand that the bursting of the bubble did not mean the downfall in its entirety.
What can we expect from the cryptocurrency market as a whole?
Statistically speaking, around 90% of crypto projects will fail. This is not a strange number considering that 92% of all startups ultimately fail. No one knows what the future will look like. So it’s difficult to say anything about it, but one thing is certain…
Only the best crypto projects will continue to exist and shape the future of the crypto market.
Bubble Burst in the Period from 2000 to 2002.
Many companies, such as Pets.com in eToys.com, failed terribly and eventually even went bankrupt. Other companies, including Sony in Cisco (whose share fell by 86%), lost a large portion of their market value but survived and never returned to their peak. Only a small portion of tech companies, like eBay.com and Amazon.com (which at its lowest point even fell below $6 per share), recovered and eventually even surpassed.
Between September 1999 and July 2000, insiders at Dotcom, companies cashed out approximately $43 billion; the individual investor paid the price. Everyday people were the most aggressive investors in the Dotcom bubble at its peak. And that was exactly the moment the smart money started running away. By 2002, 100 million individual investors had lost $5 trillion in the stock market.
Of course, it didn’t turn out badly for everyone. At least for the people who sat and waited with a lot of cryptos.
How can you Buy Cryptocurrency or a Crypto Index?
If you want to buy cryptos or ETFs, you need a broker. You have a lot of choice, so if you want to know which brokers we use, we have them on this page; our recommended brokers are listed. We invest in cryptos with the following philosophy, and here is how I do it
“If the crypto market is going to boom, then you want to own a little bit, and if the crypto market collapses, then you want to own a little bit.”
What means I should buy a broadly diversified index of ETF!
What do I do myself to invest without batting an eye?
I have recently started buying myself a crypto index every month via Bitpanda. There, they can choose from 3 different indices, one of which is invested in the top 25 crypto coins. Personally, I think the spread is important, and that is why I chose the BCI25. With this index you buy, in my case every month, the top 25 cryptocurrencies based on market size and liquidity. This is possible from €10 per transaction.
This, dollar cost averages or a fixed amount periodically in this index; you don’t have to worry about the timing. The index automatically adjusts the weighting of your portfolio over time. This way you get nice average returns from the top 25 cryptocurrencies of the crypto market without having to worry much about it. If you want to buy cryptos or ETFs, you need a broker. You have a lot of choice, so if you want to see which brokers we use, we have them on this page; our recommended brokers are listed here.
Conclusion
History seems to repeat itself again and again, and if we assume that the crypto industry is here to stay, then it is reasonable to assume that the majority of blockchain assets will not get off the ground or will never return to their original form.
On the other hand, it is likely that some crypto projects will ultimately stand the test of time, but unfortunately it is impossible to predict which projects in particular will succeed, just like with choosing stocks.
If you want to achieve a return that beats the majority of investors, buying a broadly diversified index fund or ETF is the solution. This applies to shares, but also to cryptocurrency.
However, there is no guarantee that the cryptocurrency market will ever experience the same increases as a few years ago. Plus, cryptocurrencies and digital currencies can be part of portfolio diversification. Opinions are divided on whether that is a good idea, so it is now mainly a matter of personal philosophy.
If you believe in the future of cryptocurrency, and you want to start investing in it, or you are currently invested in it, it may be wise to take some basic investing rules into account. Make sure you are well spread out; don’t try to time it by spreading out, and have patience.
