The rise in Bitcoin exchange rate is attracting more and more public attention. It so happened historically that people here are divided into 2 categories: ardent supporters and irreconcilable opponents; There are few indifferent people. Analysts also do not lose the opportunity to speak out, some of whom predict the future of Bitcoin, while the other part says that a collapse is inevitable and the bubble should burst soon.

The latter includes Howard Marks, who recently warned his clients about the dangers of investing in Bitcoin. Howard Marks is a billionaire investor, co-chairman of Oaktree Capital Group, a financial services firm with $99 billion in assets under management, and famous for accurately predicting the infamous dot-com bubble.

In his letter, Marx wrote: “I believe that digital currencies are nothing more than an unsecured fantasy (or even a pyramid scheme) that is built entirely on the desire to attribute value to something that has no value.”
“Serious investing involves buying things that are priced attractively relative to their intrinsic value. Speculation, on the other hand, occurs when people buy something without considering the intrinsic value or price match.”

In his letter, Marx draws parallels between Bitcoin and the tulip fever of 1637, the South Sea bubble of 1720, and the Internet bubble of 1999. Let’s take a closer look at the latter, since it seems that recently many analysts have begun to appeal to this term to describe the current state of the cryptocurrency market.

The dot-com bubble was a series of events that occurred in the late 1990s, characterized by rapid growth in stock markets, fueled by investments in Internet companies. During this time, stock markets took off, and the NASDAQ index of high-tech stocks rose from below 1,000 to above 5,000 between 1995 and 2000.

The dot-com bubble grew out of a combination of speculative or popular commodity investments, an oversupply of venture capital funding for startups, and the inability of dot-coms to generate revenue. Investors poured money into Internet startups in the second half of the 90s, hoping that someday these companies would take off. Many investors and venture capitalists did not consider the possibility of unprofitability of such enterprises, blindly believing in the success of all companies that were going to use the Internet as a key factor in their growth.

The 90s were characterized by the rapid development of technology in many areas. The commercial use of the Internet has led to the greatest growth in capital in the United States. Technology giants such as Intel, Cisco and Oracle drove the organic growth of the technology sector, but they also set the stage for the future growth of many dot-coms. The term dotcom comes from the English name dot-com, which in a more familiar form for us looks like .com - a commercial top-level domain.

The bubble that formed over the next 5 years was fueled by cheap money, easy capital, excessive investor confidence in the market and naked speculation. Venture capitalists looking for the next big opportunity would invest in any company that had a ".com" domain in its name. Such investments could pay off only after several years of successful existence of these companies, however, investors, overwhelmed by the desire for easy money, ignored fundamental calculations. Companies that had yet to start generating income, and often even complete a product, went public, and their shares soared 3-4 times in a day.

The NASDAQ index jumped to 5048 on March 10, 2000, nearly doubling for the year. At the peak, leading high-tech companies such as Dell and Cisco placed huge sell orders, causing investors to panic-sell their shares. In just a few weeks, the stock market lost 10%. Investment capital began to flow away from the market, and along with it, the viability of the dot-coms began to dissolve. Dot-coms, which had market capitalizations of hundreds of millions of dollars, lost all value in a matter of months. By the end of 2001, most of the publicly traded dot-com companies had closed their doors, and trillions of dollars in investment capital had evaporated.

(mainly American), as well as the emergence of a large number of new Internet companies and the reorientation of old companies towards Internet business at the end of the 20th century. Shares of companies offering to use the Internet to generate income skyrocketed in price. Such high prices were justified by numerous commentators and economists who claimed that a “new economy” had arrived; in fact, these new business models turned out to be ineffective, and the funds spent mainly on advertising and large loans led to a wave of bankruptcies, a strong drop in the index NASDAQ, as well as a collapse in prices for server computers.

While the latter part of this period was an alternation of sharp rises and crashes, the Internet boom is generally attributed to the steady commercial growth of Internet companies associated with the advent of the World Wide Web era, which began with the first release of the Mosaic web browser in 1993 and continued throughout the 90s. .

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2000s: dot-coms, Enron bankruptcy, financial statements manipulation

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Root Causes

If we put aside the superficial and obvious reasons mentioned above (comments regarding the “new economy”, investing investors' funds in advertising and marketing instead of business development), we can identify the true cause of the collapse. It lies in the fact that, thanks to the efforts of both businessmen who are not completely clean, and enthusiastic apologists of the new economy, a substitution of concepts has occurred in the minds of investors and dot-com creators: doing business via the Internet is only a tool for carrying out a business process, but not an independent business process capable of generating income from invested capital. However, using this tool you can greatly increase the efficiency of a “traditional” business or implement a new business idea (impossible or ineffective without the Internet).

The first case can be illustrated by the activities of various online stores (for example, Amazon.com). Trade in goods through catalogs (or through teleshopping) with postal delivery was a fairly large and profitable business segment even before the advent of the Internet. The use of direct sales via the Internet with automation of ordering and payment processes, updating catalogs, and logistics made it possible to increase both the speed of capital turnover and audience coverage.

An illustration of the second case can be the online auction eBay. Without the use of the Internet, it is impossible and impractical for individuals, as well as small and medium-sized businesses, to organize auctions to sell their belongings or products (with the exception of extremely expensive or exclusive goods) due to costs incommensurate with revenue, and in some cases due to the inability to attract to the buyer's auction due to territorial remoteness.

An example that applies to both the first and second cases is the use of the Internet for stock trading. Before the widespread use of the Internet, decisions to conduct stock exchange transactions were made “on the spot” by brokers or analysts of the relevant companies, based on either pre-given client instructions (specific to price values ​​and names of securities or general regarding the purchase/sale strategy), or direct telephone consultations with client. The natural limitation of available time for the exchange of information and the inability to simultaneously contact all clients led to a shift in the “center of gravity” in decision-making towards professional market participants.

The ability to remotely view securities quotes, as well as remotely issue instructions to stock exchange agents to carry out transactions, has led to the emergence of a new approach to traditional business: in this case, the client himself is engaged in market analysis, choosing a strategy and actually carries out transactions himself, leaving only documentation issues to professional participants transactions and maintaining financial and accounting records. This approach, on the one hand, has increased the efficiency of traditional exchange trading (from the point of view of clients); on the other hand, it is impossible without the existence of the Internet. At the same time, the old principle of exchange trading (when the decision is made by a professional market participant) was and remains effective and attractive, for example, for use by investment or pension funds, which do not have a corresponding division and transfer asset management to a third party.

Course of events

The dot-com bubble burst on March 10, 2000, when the NASDAQ Composite index of high-tech companies collapsed. Before that, it reached its maximum of 5048.62 (with a daily peak of 5132.52), thereby doubling the level of a year ago. Most dot-com companies collapsed along with the American stock exchange. As a result of these events, hundreds of Internet companies went bankrupt, were liquidated, or were sold. Several company executives were convicted of fraud and embezzlement of shareholders' money. Most of the business models of the new Internet-focused companies were ineffective, and their funds were spent mainly on marketing campaigns and advertising on television and in the press.

After these events, for several years, the word “dotcom” began to be used as a designation for some immature, ill-conceived, or ineffective business concept.

The term "dotcom" for such companies comes from the commercial top-level domain - .com (literally - dot com).

Consequences

The dot-com crash consisted of a loss of confidence in the securities of high-tech firms associated with the provision of services via the Internet. This was caused, on the one hand, by a significant revaluation of the so-called. post-industrial technologies, which in practice did not live up to the expectations attributed to them, on the other hand, there was uncontrolled speculation on these expectations, which greatly increased the negative effect of the decline in confidence. In fact, an entire sector of services ceased to exist, the demand and value of which turned out to be inflated. This was accompanied by the ruin of thousands of firms and companies of various levels, mostly newly formed.

Some companies in the communications sector were also unable to bear the financial burden and were forced to file for bankruptcy. One of the largest players, WorldCom, was caught conducting illegal banking transactions every year to increase profits. WorldCom's market value collapsed when this information became available to the public, causing the third largest bankruptcy in US history. Other examples include NorthPoint Communications, Global Crossing, JDS Uniphase, XO Communications and Covad Communications. Companies like Nortel, Cisco, and Corning were disadvantaged because they relied on infrastructure that was never built, causing Corning's stock to drop significantly.

Many dot-coms ran out of funds and were bought or liquidated; domain names were purchased at residual prices by competitors or investors. Some companies and their boards have been charged with fraud for misusing investors' funds, and the US Securities and Exchange Commission has fined major investor firms (such as Citigroup and Merrill Lynch) millions of dollars for misleading investors. Many related industries, such as advertising and logistics, have reduced their activities due to falling demand for services. Many large dot-com companies, such as Amazon.com or eBay, survived the turmoil and appear confident of long-term survival, while others, such as Google, have become industry-leading corporations.

The stock market crash of 2000-2002 caused the market value of companies to fall by US$5 trillion between March 2000 and October 2002. Terrorist attack 9/11 , which destroyed the Twin Towers of the World Trade Center and killed more than 700 Cantor-Fitzgerald employees, ultimately slowed the decline in stock market trading by introducing mechanisms to directly control the processes of speculation in securities associated with “anti-terrorist” activities.

There is an opinion that only 50% of dot-com companies survived by 2004, but it is not indicated in what form they “survived” and due to what type of activity. Claims that the loss of assets on the stock exchange is not directly related to the closure of companies are false, because they turn everything upside down. These companies prospered for some time only through speculative transactions in securities, without providing even a small part of the services and without receiving the corresponding profits that investors expected from them. The incompetence in economic matters of the investors themselves was caused by the intensive processing of public opinion, which was convinced of the emergence of a new “post”-industrial era, which supposedly abolished any requirements for the availability of real productive resources for economic activity. Thus, the information superstructure was presented as the entire economic mechanism.

Many laid-off technology experts, such as programmers, are facing a saturated job market. In the US, international outsourcing and the recent increase in the number of skilled foreign workers (participating in the US H-1B visa program) have aggravated the situation. University computer science programs have seen a decline in the number of new students. Anecdotes about programmers returning to study to become accountants or lawyers were popular.

One of the reasons for the dot-com crash was the mispricing of the assets and prospects of Internet companies, as a result of which investors were provided with inflated estimates of the companies' value. Such analytical activities of investment houses attracted the attention of financial regulators. Laws were passed on the division of commissions ( Commission sharing agreement, client commission arrangements), according to which a guaranteed portion of brokerage fees received by investment houses goes to pay analysts. As a result, investors have the opportunity to receive independent analytics, which provides a comprehensive view of the investment attractiveness of Internet companies and makes it possible to avoid inflating new economic bubbles in the future.

(mostly American), as well as the emergence of a large number of new Internet companies and the reorientation of old companies towards Internet business at the end of the 20th century. Shares of companies offering to use the Internet to generate income skyrocketed in price. Such high prices were justified by numerous commentators and economists who claimed that a “new economy” had arrived, but in fact these new business models turned out to be ineffective, and the funds spent mainly on advertising and large loans led to a wave of bankruptcies, a strong drop in the index NASDAQ, as well as the collapse in prices for server computers.

While the latter part of this period was a series of booms and busts, the Internet boom is generally referred to as the steady commercial growth of Internet companies associated with the advent of the World Wide Web, which began with the first release of the Mosaic web browser in 1993 and continued throughout the 1990s. .

Root Causes

If we put aside the superficial and obvious reasons mentioned above (comments regarding the “new economy”, investing investors' funds in advertising and marketing instead of business development), we can identify the true cause of the collapse. It lies in the fact that, thanks to the efforts of both businessmen who are not completely clean, and enthusiastic apologists of the new economy, a substitution of concepts has occurred in the minds of investors and dot-com creators: doing business via the Internet is only a tool for carrying out a business process, but not an independent business process capable of generating income from invested capital. However, using this tool, you can greatly increase the efficiency of a “traditional” business or implement a new business idea (impossible or ineffective without the Internet).

The first case can be illustrated by the activities of various online stores (for example, Amazon.com). Trade in goods through catalogs (or through teleshopping) with postal delivery was a fairly large and profitable business segment even before the advent of the Internet. The use of direct sales via the Internet with automation of ordering and payment processes, updating catalogs, and logistics made it possible to increase both the speed of capital turnover and audience coverage.

An illustration of the second case can be the online auction eBay. Without the use of the Internet, it is impossible and impractical for individuals, as well as small and medium-sized businesses, to organize auctions to sell their belongings or products (with the exception of extremely expensive or exclusive goods) due to costs incommensurate with revenue, and in some cases due to the inability to attract to the buyer's auction due to territorial remoteness.

An example that applies to both the first and second cases is the use of the Internet for stock trading. Before the widespread use of the Internet, decisions to conduct stock exchange transactions were made “on the spot” by brokers or analysts of the relevant companies, based on either pre-given client instructions (specific to the prices and names of securities or general regarding the purchase/sale strategy), or direct telephone consultations with client. The natural limitation of available time for the exchange of information and the inability to simultaneously contact all clients led to a shift in the “center of gravity” in decision-making towards professional market participants.

The ability to remotely view securities quotes, as well as remotely issue instructions to stock exchange agents to carry out transactions, has led to the emergence of a new approach to traditional business: in this case, the client himself is engaged in market analysis, choosing a strategy and actually carries out transactions himself, leaving only documentation issues to professional participants transactions and maintaining financial and accounting records. This approach, on the one hand, has increased the efficiency of traditional exchange trading (from the point of view of clients); on the other hand, it is impossible without the existence of the Internet. At the same time, the old principle of exchange trading (when the decision is made by a professional market participant) was and remains effective and attractive, for example, for use by investment or pension funds, which do not have a corresponding division and transfer asset management to a third party.

How it was

The dot-com bubble burst on March 10, 2000, when the NASDAQ index of high-tech companies collapsed. Before this, the NASDAQ index reached its maximum of 5048.62 (with a daily peak of 5132.52), thereby doubling the level of just a year ago. Most dot-com companies collapsed along with the American stock exchange. As a result of these events, hundreds of Internet companies went bankrupt, were liquidated, or were sold. Several company executives were convicted of fraud and embezzlement of shareholders' money. Most of the business models of the new Internet-focused companies were ineffective, and their funds were spent mainly on marketing campaigns and advertising on television and in the press.

After these events, for several years, the word “dotcom” began to be used as a designation for some immature, ill-conceived, or ineffective business concept.

The term "dotcom" for such companies comes from the commercial top-level domain - .com (literally - English. dot com"dot com")

Consequences

The dot-com crash consisted of a loss of confidence in the securities of high-tech firms associated with the provision of services via the Internet. This was caused, on the one hand, by a significant revaluation of the so-called. post-industrial technologies, which in practice did not live up to the expectations attributed to them, on the other hand, there was uncontrolled speculation on these expectations, which greatly increased the negative effect of the decline in confidence. In fact, an entire sector of services ceased to exist, the demand and value of which turned out to be inflated. This was accompanied by the ruin of thousands of firms and companies of various levels, mostly newly formed.

Some companies in the communications sector were also unable to bear the financial burden and were forced to declare bankruptcy. One of the largest players, WorldCom, was caught conducting illegal banking transactions every year to increase profits. WorldCom's market value collapsed when this information became available to the public, causing the third largest bankruptcy in US history. Other examples include NorthPoint Communications, Global Crossing, JDS Uniphase, XO Communications and Covad Communications. Companies like Nortel, Cisco, and Corning were at a disadvantage because they relied on infrastructure that was never built, causing Corning's stock to drop significantly.

Many dot-coms ran out of funds and were bought or liquidated; domain names were purchased at residual prices by competitors or investors. Some companies and their boards have been charged with fraud for misusing investors' funds, and the US Securities and Exchange Commission has fined major investor firms (such as Citigroup and Merrill Lynch) millions of dollars for misleading investors. Many related industries, such as advertising and logistics, have reduced their activities due to falling demand for services. Many large dot-com companies, such as Amazon.com or eBay, survived the turmoil and appear confident of long-term survival, while others, such as Google, have become industry-leading corporations.

The stock market crash of 2000-2002 caused the market value of companies to fall by US$5 trillion between March 2000 and October 2002. Terrorist attack 9/11 , which destroyed the twin towers of the World Trade Center and killed more than 700 Cantor-Fitzgerald employees, ultimately slowed the decline in stock market trading by introducing mechanisms to directly control the processes of speculation in securities associated with “anti-terrorist” activities.

There is an opinion [streamlined expressions] that only 50% of dot-com companies survived by 2004, without indicating in what form they “survived” and through what type of activity. Claims that the loss of assets on the stock exchange is not directly related to the closure of companies are false, because they turn everything upside down. These companies prospered for some time only through speculative transactions in securities, without providing even a small part of the services and without receiving the corresponding profits that investors expected from them. The incompetence of investors themselves in economic matters was caused by intensive processing of public opinion, which was convinced of the emergence of a new “post-industrial era”, which supposedly abolished any requirements for the availability of real productive resources for economic activity. Thus, the information superstructure was presented as the entire economic mechanism.

Many laid-off technology experts, such as programmers, are facing a saturated job market. In the US, international outsourcing and the recent increase in the number of skilled foreign workers (participating in the US H-1B visa program) have aggravated the situation. University computer science programs have seen a decline in the number of new students. Anecdotes about programmers returning to study to become accountants or lawyers were popular.

One of the reasons for the dot-com collapse was an incorrect assessment of the assets and prospects of Internet companies, as a result of which investors were provided with inflated estimates of the value of the companies. Such analytical activities of investment houses attracted the attention of financial regulators. Laws were adopted on the division of commissions (Commission sharing agreement, client commission arrangements), according to which a guaranteed part of the brokerage fees received by investment houses goes to payments to analysts. As a result, investors have the opportunity to receive independent analytics, which provides a comprehensive view of the investment attractiveness of Internet companies and makes it possible to avoid inflating new economic bubbles in the future.

see also

Notes

Wikimedia Foundation. 2010.

People have been and will continue to be driven by greed. The prices of assets on the stock market (either individually or in the form of a diversified fund) are formed not only from the performance of the business that owns these assets, but also from people’s ideas about what kind of profit can be expected from certain shares. This leads to periodic overvaluation of a particular business, which is expressed in a sharp rise in its stock prices and profitability significantly higher than the market average. The so-called “bubble” is inflated.

Some time passes and quotes fall to a level below average (the bubble bursts), which on the scale of the entire economy is expressed by the concept of “recession”, or even “stagnation”. Over the long term, bubbles and recessions balance out and lead to an average ratio - stock market returns of approximately 5-7% above the inflation rate, regardless of the country and currency chosen. But in the short term, ups and downs can be expressed both in large enrichments, and (much more often due to greed and insufficient knowledge) in the ruin of players, especially if they use leverage. However, in the situation described below, actual bankruptcy could well have occurred without it.

The name “dot-com bubble” (dot is the dot and com is the most famous domain in the world) appeared already in the 2000s - and in 1999 the rise of technology stocks was called the “Great Tech Revolution”. In general, the term refers to the huge run-up in the stock prices of Internet companies in 1995-2000, when the index of technology stocks rose by several hundred percent. It was extremely difficult to resist its charm - the possibilities of the Internet (in Russia a little later, and in America, apparently even before the collapse of the bubble) were fully felt by ordinary citizens. E-mail, news every second, ordering goods on the Internet - all this has become a familiar part of today's reality, although just 15 years ago the world really changed almost every day.

Of the major investors, only Buffett completely ignored Internet companies, true to his concept of investing only in the business that he understands. But George Soros lost more than 3.5 billion dollars in 1999 and 2000. The word “revolution,” by the way, fits this context very well - started with the inspiration of the masses, who are usually not stingy with sacrifices, it subsequently leads to a difficult belated epiphany, when it is too late to correct anything. Let me use the parallel with the revolution in a number of cases further. The first “victims” in the stock market are the most blinded audience - it becomes at the moment when stocks begin to plummet from Olympic heights to the very foot of the mountains or even lower, also called “massacre” in the jargon.

Any revolution has its inspirers, often referred to as “gurus” in the investment community. In an era of general optimism, when stock prices are rising by leaps and bounds, it is extremely difficult to go against the crowd and its inspirers, not only publicly, but even within oneself. It is easier to believe in good things when everything around you is beautiful. “This time everything is different” - this well-known stock exchange postulate was optimistically interpreted by supporters of the Internet revolution, apparently expecting the same complete and eternal happiness that the leaders of all real revolutions spoke about - from the French one in 1789 to ours in 1917. Both It is known that they ended in mass executions, including of their supporters. Managed funds showed excellent returns in 1995-2000, but went into negative territory in 2000-2005. And although on average over 10 years the situation for investors would have been good, they significantly lost to the funds due to late entry into an overheated market (John Bogle. The Smart Investor's Guide):

The values ​​shown in the table imply profit or loss in each of the three years. Therefore, the real losses of investors of RS Emerging Growth for 2000-2002 amounted to 80%, MorganStanley Capital Op about 85%, and losses of Fidelity Aggressive Growth reached 87%. On average, over this period, losses of those who bought high-tech funds were 34% each year - this means that even if they entered in 1997, they would not have been able to earn anything (only about 2% per annum for 1997-2002, which is approximately equal to inflation in the United States). And only the period 1995-2005 would give the dot-com investor a satisfactory result, comparable to the average historical return of American stocks.

However, America at the end of the 20th century was filled with optimism. During a summer 1999 West Coast debate between Jim Glassman and Barton Biggs, the latter's comparison of the current situation to the tulip fever of 1650 was at best incomprehensible to the listening audience. Probably, some even decided that the speaker had problems with an adequate perception of reality - after all, new technologies and the Internet created a new economy in which the old market laws simply ceased to exist. The abolition of the old, by the way, is also an indispensable property of the revolution: the Thermidorian calendar, the destruction of churches, etc. But there is another, no less indispensable consequence - a subsequent return to what was before the changes.

Jim Glassman was well suited to the role of small leader, since shortly before the debate he had co-authored a rather large article, “Dow 36,000,” heralding an unprecedented future rise in the stock market. This article was quickly turned into a book with a similar title, which became a bestseller, and Glassman and his colleague Hassett gained enormous popularity.

At the same time, it is difficult to classify them as charlatans, since there is every sign that they sincerely believed in what they said. Both had good reputations and were members of respected financial institutions - for example, Hassett worked as a senior economist at the Federal Reserve. By the way, few people know that Isaac Newton (besides the law of universal gravitation, known for his work at the mint and the invention of fluting the side of coins to protect them from cutting the metal and increase security) was involved in the South Seas campaign bubble of 1720 - when he first sold everything shares with a profit of 100%, but then could not stand it and bought them again in even larger quantities than before. As a result, this resulted in a complete loss of capital for him.

It is also interesting that even reaching the level of 36,000 of the Dow Jones index, according to Glassman, should only slow down the subsequent return of shares, but still leave it at a level of more than 10% per annum. In passing, I note that dot-com companies practically did not pay dividends - and with such exchange rate growth, no one paid attention to them, although according to statistics over the last 100 years, dividends gave about 50% of the total return of the stock index. At the same time, Glassman talked about reducing the volatility of stocks - and although he rightly emphasized their advantage over bonds in the long term, he believed that it was possible for the sale price of stocks to exceed the income due on them by at least tens of times (the historical average is about 15).

Those. in fact, all traditional methods of assessment and the history of quotes of the same Dow Jones index were rejected - which, even without taking into account the crisis of 1929, showed stagnation from 1965 to 1982 (and due to the strong inflation of the 70s, the return of quotes in fact meant the loss of more half the purchasing power of a dollar). The historical volatility of the American market is approximately 20% for stocks and 8% for bonds, i.e. shares are approximately 2.5 times a riskier instrument. In today's extremely low bond environment, the risk premium in equities can be considered more than satisfactory. And this is what the Dow Jones index looks like today:

As you can see, even 15 years after the events described, the index is at levels two times lower than those described in the book. The 2000s, like the 1970s, cannot be called successful for the American market: quotes at the level of 1999 were repeated in 2010, when after the real estate crisis of 2008, the market again dropped by almost 50% in 2009. Moreover, it is clear that the angle of rise in quotes from 2009 to 2015 approximately corresponds to the angle of rise during the period of dot-com growth in 1995-2000, which raises some concerns about the future profitability of the American market.

The consequences of the dot-com bubble are well known and have become classics - however, it can be added that, unlike the simple analogy of a balloon bursting or deflating, the real fall can be much more complex, including several stages of disappointment and hope. Difficult to see on charts with time scales of years or decades, daily or weekly fluctuations can cause many investors to make repeated bad decisions. The 2008 real estate bubble deflated relatively smoothly and quickly, but the same could not be said for the dot-com bubble. By early August 1999, shares of eBay, Amazon, Yahoo and a number of other companies had sharply lost half their value; however, over the next seven months, many of them tripled or more again. For example, eBay jumped from 70 to 250 dollars per share, Intel simply doubled due to its huge capitalization.

This was seen by proponents of the New Age theory as passing a test of strength. In the early spring of 2000, a new round of decline followed; However, after some time, the index again pulled up to its previous levels, again causing a surge of optimism, which was now more reminiscent of despair. As it soon became clear, this was the last chance for investors to successfully exit the market, “selling an expensive asset to that fool who hopes to sell it for an even higher price.” At the beginning of September, everything really began to collapse - Intel lost $240 billion in five weeks, collapsing its quotes by 45%; The entire NASDAQ index fell from a peak of 5048 points to 1114 in October 2002, thus losing more than 80% of its value. The quotes of a number of companies fell by 95% or more - their investors actually faced a huge loss, since the restoration of the quotes of most issuers to the previous level (see, for example, Yahoo), unlike the index, did not happen. The same Yahoo in 2006 repeated its maximum daily fall, falling by 20% during the session.

Bottom line

Fortune telling on quotes, regardless of what position you take, most often leads to loss of funds. While for an investor high volatility is an opportunity to buy assets at low prices, for a speculator things can turn out differently. The above example also demonstrates the dangers of the industry index. Invest in a high-quality, diversified portfolio of exchange-traded funds - this is the optimal solution for a smart investor who wants to beat inflation.

Noam Levenson - writer, researcher, blockchain investor, chairman and co-founder of Eden Block - studied the phenomenon of the cryptocurrency bubble (yes, in his opinion it is a bubble) through the prism of the dot-com crash at the beginning of the century and identified signs that will warn us that The bubble has reached its limit and is about to burst. In work on the original material Popping The Bubble: Cryptocurrency vs. Dot Com, published by Hacker Noon. We offer you a translation.

Bubble. Not since I celebrated my birthday in third grade have I heard this word more often than now. This is the “kryptonite” of every crypto investor, the most popular agenda, CNBC’s favorite buzzword. It doesn't matter which reporter is speaking - the term is always pronounced with the same emotion a stunned deer that was blinded by car headlights on the highway at night, and is accompanied by the warning: “In fact, we have no idea about the subject in question.”

Whenever someone claims that cryptocurrencies are a bubble, I resist the instinctive urge to argue. It's like hearing someone twist quotes from your favorite movie. Typically, people claim a bubble without even a shadow of an understanding of the nature of blockchain, Bitcoin... and bubbles. However, while the CNBC reporter throws darts blindfolded and hopes to hit the bull's-eye, there may be some truth to the bubble claims.

First, here's the definition of a bubble: "Trading an asset at a price or price range that is significantly higher than the actual value of the asset."

I will use two indicators: speculation And application. We speculate about what use the asset will find in the future, comparing it with its actual use. The largest bubbles form when there is a serious mismatch between speculation and application. Therefore, the new technology of noise-canceling headphones will most likely not lead to bubble formation. The application of this technology is quite obvious: to drown out the screams of newborn babies, which leaves no room for speculation. There is no room for assumptions in this industry; In addition, the technology affects only a single sector, so the potential for its mass distribution is small.

Think about the Internet at its inception, or about distributed ledger technology (this term refers to all technologies of this kind: directed acyclic graphs, hashgraphs, etc.) today. The Internet has connected and transformed almost every existing industry. Today, distributed ledger technology has the potential to do the same, spanning industries from peer-to-peer payments, finance and the Internet of Things to healthcare, contracts and supply chain. The real potential is there, but the application is not there yet. This creates an environment in which a massive bubble can inflate. Everyone can speculate to their heart's content, since there is no way to refute speculation. Tell me that the toaster will revolutionize the automobile industry and I'll tell you that's bullshit. Technologies similar to toaster technology, didn't produce such a revolution, so we are talking about baseless speculation. But tell me that distributed ledger technology will radically change the airline industry, and it will be a compelling proposition that I cannot refute.

It is impossible to deny that we are dealing with a bubble.

And this leads me to the following conclusions. Key characteristics of any bubble:

1. wide distribution;
2. extremely narrow and limited scope of application at present;
3. the asset has no fundamental value - it is difficult to value.

Theoretical uses of distributed ledger technology will only add to the speculation. However, real working applications will eventually emerge. New challenges will arise. The scale of technology implementation will increase dramatically. But since the level of speculation was so high, application was bound to fall short of expectations. When it becomes clear that application will never live up to speculation, a market correction will occur and hard capitalization will be achieved. The bubble will burst.

This is exactly the fate that awaits shitcoins.

We're talking about the internet bubble, the great depression, having an accident on your first day behind the wheel. Markets will fall so rapidly that speculation will suddenly be out of use. The market will suddenly become fundamentally undervalued. And it will remain in this state for months, after which it will be reborn from the ashes when the strongest companies manage to lead its upward movement.

However, unlike many people who talk about a bubble to discourage people from investing, I talk about it in a different sense. We are always in a bubble; Almost every market is a cycle of “inflating” and “exploding” a bubble. Even the $18.5 trillion New York Stock Exchange. follows this cycle; As speculation grows about the future of the American economy, reality must eventually assert itself. When the market overestimates reality, a bubble forms. When reality fails to meet these expectations, the market crashes. The magnitude of the collapse is not necessarily as dramatic as in the cryptocurrency markets, where it reaches 40%, but the fact that bubbles are a natural part of the investing process is beyond doubt.

So the question is not whether we are in a bubble, but what the size of the bubble will be. If we respect the natural evolution of advanced technology, we must understand that every massive speculative price hike is followed by an equally massive crash. From the tulip mania of the 1600s to the Internet bubble of just 15 years ago, crashes are inevitable. What matters is what the bubbles of the past can teach us and to what extent we can use these lessons as a guide when working in the cryptocurrency market.

Philosopher George Santayana wrote:

People who cannot remember the past are doomed to repeat it.

And as Peter Lamborn Wilson said even more aptly:

People who understand history are doomed to watch idiots repeat it.

The psychological factor underlying large-scale speculative buying lies in human nature itself. Bubbles follow the same pattern regardless of the era or nature of the asset. Fish swim, birds peck grain, and people engage in speculative buying.

Based on this principle, we can study past bubbles to understand the current cryptocurrency bubble. By understanding the causes, symptoms and consequences, one can better anticipate its trajectory. Become a person capable of playing the short game and winning in it.

I want to clarify: my argument does not boil down to Bitcoin. Bitcoin's value is inconclusive. Due to the low speed of transaction processing and high commissions, Bitcoin lacks functionality, and therefore its value depends significantly on how people perceive it. On the other hand, distributed ledger technology has serious application potential. Once again, I will emphasize that when considering speculation and application, I intend to prioritize projects based on distributed ledger technology in general, and not Bitcoin.

The implementation of any technology follows the following route:

Technology Acceptance Curve

This phenomenon is known as technology acceptance curve. It is directly related to what I wrote above about speculation and application. The driving force of development at stages emergence of innovation, appearance of the first clients And early majority formation speculation appears.

But by the time a new technology begins to be adopted by a belated majority, the need for real implementation and application becomes critical; the degree of implementation does not correspond to the level of mass speculation, and a collapse begins.

In the 1630s, Holland experienced a tulip boom, known today as Tulip Mania. According to historical evidence, tulip prices rose by 2000% in four months, after which they fell by 99%. In the late 1980s, Japan attempted large-scale economic stimulation, which led to massive speculation. From Investopedia: “At the peak of the real estate bubble in 1989, the value of the plot of land on which the Tokyo Imperial Palace stands was greater than the value of all real estate in the entire state of California. Subsequently, in the early 1990s, the bubble burst.” We know these events as the Japanese real estate and stock market bubble.

But for us, the most relevant example with which to compare current events will be the dot-com bubble of the 1990s, which burst in 2001-2002.

By the beginning of the new millennium, it became obvious that the Internet would change the world. It began to transform every industry and ushered in a new economy, a new way of doing business, peer-to-peer communications... sound familiar? The application managed to justify all the speculation and even surpass it. It was perhaps the most significant and revolutionary technological innovation since the Industrial Revolution; some will say that it turned out to be even more significant. But, despite the stunning success, there was a huge collapse.

Let's move the clock back 22 years. It's 1999, and you're a savvy investor enthusiastic about the Internet revolution. The top six tech companies are worth $1.65 trillion, 20% of US GDP, yet you're constantly ridiculed by friends who think you're investing in the next fax machine. Feeble-minded.

You know that if you do your due diligence, you will find golden dot-com companies worth investing in. One day one of them catches your attention. The company meets all your requirements: a strong team (the two founders of Borders books) and strong support from traditional financiers (Sequoia Capital and Benchmark Capital - later Goldman Sachs).

This is a company called WebVan, which sells groceries online and promises delivery within half an hour. In 1999, it raised $375 million, after which it managed to quickly grow to $1.2 billion. Bullish trend, innovation? Sounds familiar! In July 2001, its shares on the stock exchange fell from $30 to 6 cents, and WebVan was losing $700 million a day.

Dotcom crash

In total, $5 trillion was lost between 2000 and 2002. This is the value of 25 Bitcoin markets. Pop - and they are gone! Only 50% of dot-com companies survived the bubble, and the other half became startup graveyards on Wall Street and Silicon Valley. Alas, the Internet was not developed enough back then to allow these people to express their grief in the form of memes.

What was the mistake?

In the modern world, where access to the network is possible from anywhere and perfect communication, it is difficult to imagine that it was once difficult for the Internet to recruit and develop a network of users. In the mid-1990s, the Internet still had minimal use, but websites "whatever.com" have already begun to multiply everywhere. It was enough to include “dot com” in the company name to get a lucky ticket to participate in the stellar IPO campaign; not to mention several hundred million in addition.

Pets.com, WebVan- the examples are countless. These were all stars that shone brightly and then set. Speculation grew too rapidly. It was too ahead of the fundamental value: users. Instead of speculation about it may become this phenomenon, suddenly came the understanding that what it became. Ultimately, speculation led to inflated valuations that destroyed many companies. Companies need a reality check; they need pressure and obstacles - a $500 million valuation immediately after an initial public offering does not lead to success. Unfortunately, it is not only poorly managed companies that suffer. Everyone showed negative growth, including NASDAQ, Amazon And Apple.

Apple stock during the crash - from a peak of $4.95 per share to $1.00 in just nine months

Now let's change the scale: the arrow points to the dot-com crash

Amazon's collapse was even more dramatic, from $85.06 in 1999 to $5.97 by 2001. When a market correction begins, no one is immune.

The same, but different?

Everyone is making comparisons between dot-coms and cryptocurrencies. The driving force behind these developments has been the promise of new technologies that are difficult to accurately evaluate. As we have already said, bubbles are bubbles, no matter what asset we are talking about. However, the rules of the game have changed. 2018 is not 2000. Should we focus on the dot-com bubble? Is distributed ledger technology destined for the fate of the Internet?

Let's look at the key differences between the two.

Roller coaster

If the dot-com bubble was your favorite roller coaster at Disneyland, then the digital asset market is the slingshot. (sling shot), which you “will definitely want to ride someday.” The blockchain market is growing faster than any other market. It is more volatile; it is possible with fortune profits and catastrophic losses.

Blockchain is like Texas, and in Texas everything is bigger...even losses. WebVan's demise of $700 million in daily losses falls short of some of the biggest losses in cryptocurrency history, such as Ripple's dark day, when the company lost $25 billion on January 8th of this year.

Ripple's Giant Volatility

These fluctuations are due to several factors, but primarily investor access to cryptocurrencies and the free flow of information on the Internet. Thus, the ninth wave of cryptocurrency volatility arises. In addition, the presence of many exchanges, both centralized and decentralized, creates preconditions for the purchase of securities for resale and for market manipulation.

Since insider trading and market abuses in the blockchain space are largely unregulated, you can be sure that they occur on a large scale. A millionaire can easily influence the price of a blockchain with a market capitalization of $5 million and a daily trading volume of $100,000. Financial sharks do not miss the opportunity to make extra money on small coins, and small investors are unable to distinguish between these manipulations and the mood of the market.

Global scale

Harvard does not hold its endowment in digital assets. Your parents' pension savings are not stored there either (and if they are, sound the alarm!). These days, investors are not experienced institutional investors, but young people, inexperienced, prone to speculation and seeking easy and quick money.

During the rise of NASDAQ in the 1990s, investments could only be made through brokers and institutional investors; when it comes to cryptocurrencies, everyone can participate. You just need a device connected to the Internet. Even a shepherd from Pakistan can become a crypto trader. Day trading is perhaps more exciting than its main activity.

How much are sheep worth in Bitcoin?

These investors have 24/7 access to portfolios and receive constant updates on Twitter. They don't fully understand the technology behind these investments.

The Internet allows you to follow updates and receive information at a speed unimaginable before its invention. Very often this information is misleading. You can also run into outright fraud. As a result, panic selling and missed opportunity syndrome go hand in hand. Giant leaps are followed by collapses that are significantly greater than the collapse of the NASDAQ at one time.

But this also means that the crypto bubble could surpass the dot-com bubble in size. NASDAQ peaked at $5.048 trillion. in March 2000. This maximum was limited by barriers to entry for investors, the difficulty of quickly sharing large amounts of information, and the fact that dot-com investors were predominantly North American.

Cryptocurrencies are available to everyone who has some money and a mobile phone, anywhere in the world. This means that by the time the world begins to understand the value of distributed ledger technology, $5 trillion. will seem like an insignificant number.

This also means that trying to predict when a bubble will inflate to its maximum is a fool's errand. Instead, we should pay attention to the indicators that literally scream that this moment is coming. Here they are:

1. The media will begin to focus not only on Bitcoin (which they already do), but also on distributed ledger technology, its potential and related projects. This would mean that most of the population is already aware of the technology behind cryptocurrencies - a different situation than the current one, but CNBC is quickly making it real.
2. Influx of institutional money: hedge funds, retirement accounts, personal savings. All this will lead to a dramatic increase in market capitalization.
3. Working blockchain products that truly support large networks of users. As we continue to develop, it will become clear to us that many current projects are unable to live up to expectations. The very first failed blockchain project will create a snowball effect.
4. Significant influx of private, centralized blockchains launched by existing companies. Many expected decentralized solutions will give way to products from existing traditional companies, which will develop their own proprietary blockchain solutions in preference to decentralized, token-based platforms. It is very likely that this will lead to a massive re-evaluation of what blockchain actually is.
5. Market capitalization in the region of $5-10 trillion. Any phenomenon of this magnitude will be a source of alarm. However, it is important to understand that it is the rate of expansion that creates the bubble, not the market capitalization itself. A quick breakthrough is almost always followed by a dramatic collapse.

The fact that the public and media are not yet aware of distributed ledger technology supports my opinion that we are still far from the apogee of the bubble. The world is just beginning to accept Bitcoin. It will take years for the masses to understand the true value of blockchain. In the meantime, the cryptocurrency will continue to progress, going through periods of significant volatility. However, the overall trend will be upward - and dramatically rapid, as the market moves towards its top and inevitably approaches a crash.

What makes the February crash different from the ultimate crash when the bubble bursts? Perhaps nothing. Perhaps digital asset markets will continue to rise, crash, rise, crash again until mass adoption brings stability. The recent collapse may be the most dramatic we have ever seen. However, I think it's important that nothing has fundamentally changed for assets.

This crash was entirely based on speculation and market uncertainty. I believe the ultimate collapse will occur due to a fundamental change in the underlying assets of the cryptocurrency. It is possible that a number of companies using distributed ledger technologies will cease development due to poor management or difficulties in implementation. It is possible that some large capitalization projects will have security gaps. Whatever happens, I think that at the moment of such an explosion, many blockchains will die, doomed to exist forever without the possibility of further development.

Conclusion

It may also be that blockchain and cryptocurrency will refute all predictions, all historical models. Perhaps blockchain will transform every industry and never face a crash like the one that happened in the early 2000s. It is possible that blockchain and cryptocurrency will be able to compete with current stock markets. It is possible that decentralization will be so innovative and successful that it will fundamentally change the nature of the development of companies and projects, the nature of the psychological interaction of people with markets. It's possible... but I doubt it will happen. We may play a new game that requires courage, but we have a lot to learn from previous players and games.

Digital assets and distributed ledger technology have the potential to change the world. But this road will not be straight and smooth.