Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.

No, Bitcoin is Not “Like the Dot Com Bubble”

It has been a popular and widely used tactic for cryptocurrency skeptics to compare Bitcoin’s 2017 bull run to the dot com bubble of the late 1990s. On the surface, there are some valid reasons for this comparison. If you glimpse at the charts, it is easy to walk away convinced of their argument and that “Bitcoin’s bubble has burst.” Digging a little deeper, however, there is good reason to argue that this comparison, while convenient, has some serious holes.


What is a Bubble?

Before we break down the dot com bubble versus bitcoin comparison, it is important to take a step back. What exactly is a bubble? Bubbles occur when the price of an asset goes up rapidly without any underlying “fundamentals” (i.e. demand) to justify the spike. Basically, they are a self-feeding cycle of hype where speculators spot an asset whose price is rising at a rate much higher than the market average. They jump on board en masse, hoping to take advantage of the trend, and cause the price to rise even higher. This, in turn, draws more attention to the asset and brings in more and more speculators, which pushes the price up further.

This kind of rapid hype-driven growth is not sustainable, and eventually something triggers a bubble to burst and send the asset’s value plunging with the same vigour it experienced during its rise. Given that description, nobody would blame you for thinking Bitcoin’s recent market activity sounds a whole lot like a bubble. In fact, you’d be right! Bitcoin has arguably gone through several bubbles by this point. When we compare Bitcoin to other asset bubbles, however, and particularly the dot com bubble, some fundamental differences emerge.


Historical Context for Asset Bubbles

When major asset bubbles burst, they have historically been followed by periods of recession that often impact the broader economy as well as the particular industry surrounding the overvalued asset in question. The most severe example of this in the 20th century is the Great Depression. The government lowered interest rates and made it much easier to borrow money and take on debt, which in turn led to a huge hike in stock prices as consumers borrowed huge amounts of money and pumped money into the market. Soaring prices set the stage for a period of extravagance known as the “roaring twenties,” which in retrospect was clearly the building up of a massive unsustainable debt bubble. Savvy investors began to recognise that the majority of this economic growth was fueled by debt and they started to sell off assets to lock in their gains while they could. This triggered a panic and everyone started frantically trying to withdraw their money from banks, which did not have the capital to accommodate them. The bubble popped with the stock market crash in 1929, resulting in the worst economic crisis in contemporary American history.


The Dot Com Bubble

The dot com bubble followed a similar overall pattern of surge and crash, although with some distinctive features. The 1990s were a period of rapid technological development and the beginning of mainstream Internet adoption. Commercialisation of the Internet created a highly speculative environment full of ambitious startup companies with “.com” in their name. Beginning in 1995, investors and venture capitalists dumped money into innumerable .com companies, many of whom had not yet generated any revenue or built a working product.

This frenzy culminated in March of 2000 when the NASDAQ peaked at a value of nearly double what it was one year earlier. Then, big tech companies sold off huge shares of their stocks at the peak, which triggered a wave of panic and mass sell-offs from investors. According to Investopedia, “Dotcom companies that had reached market capitalisation in the hundreds of millions of dollars became worthless within a matter of months.” Although not nearly as widespread or severe as the Great Depression, the burst of the dot com bubble did deal a serious blow to the tech industry. Many .com companies folded, unemployment rates in Silicon Valley skyrocketed, and many investors lost huge sums of money.


Here’s the Rub

Two major points often get lots in the comparison between Bitcoin and the dot com bubble. First is the fact that Bitcoin is a different kind of asset. It has always been highly volatile. Where a rapid correction of 25% in the US housing market, for example, would absolutely indicate a bubble bursting (which is precisely what triggered the 2008 financial crisis), a 25% correction for Bitcoin, even in a single day, is not out of the ordinary. On average, Bitcoin’s price fluctuates at a rate roughly five times that of NASDAQ. A percentage drop in a traditional market that would clearly indicate a bubble does not necessarily apply to Bitcoin.

The second, and perhaps more important, point is that the dot com bubble wasn’t the death of the Internet. Companies like Amazon, Google, and Ebay, launched during the dot com bubble and went on to become some of the most successful companies in the world. The revolutionary technology that fueled the dot com bubble – the Internet – was not dismissed as a useless fad, even during the short-lived recession in the tech industry following the burst. Bitcoin and blockchain technology are, in the dot com bubble comparison, like Google and the Internet, not the bubble. Sure, there are going to be periods of volatility, massive speculation, overvalued ICOs, and possibly several bubbles in crypto as a whole, but the underlying technology and the best applications of that technology are not going away.