Most Comparisons of Cryptocurrency and the Dotcom Bubble Are Wrong.
History is telling us not to misunderstand this important emerging tech.
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It’s smart to study history.
Lately, I’ve read flawed interpretations of the dotcom bubble of the late 1990’s and what it teaches about today’s blockchain/cryptocurrency market. The two booms — dotcom and crypto — have much in common. Both were based on a new global network technology bringing breathtaking change to countless things we do in our lives. And both promised to upend countless old business models.
As it turned out, I’ve had a pretty good seat for both the dotcom and the crypto shows. What I’ve read comparing them is mostly wrong.
So following is my take on the right way to compare the dotcom boom to what we are experiencing with cryptocurrencies.
I hope it will help you make informed decisions.
A flawed premise: Even if we’re in a bubble, the only direction for the long term is up.
A popular — wrong — way to look at dotcom history starts with a discussion of these two charts:
The narrative goes something like this. These two stocks (Amazon and Apple) looked like they took a huge dive in early 2000. But that was only relative to their prices so far.
When viewed over the long term, that price drop was a minor bump on the road to blow-out greatness. The flawed conclusion is that cryptocurrencies will do the same thing. We might see a bump in the bubble, but in the long run they are great investments.
There are a lot of things wrong with this.
Breaking it down.
Amazon is — without question — the single best example of a dotcom bubble success story. And yes, you would have been wise to own it and hold it from 1998 to 2018 through the ups and downs. You would be much richer today if you had. But would you have? Not everyone loved it then, not by a long shot.
Apple, on the other hand, was not even an Internet stock at the time. Apple in the late 90’s was a struggling maker of computer hardware with no credible Internet play.
Evangelists of the dotcoms had no time at all for Apple in 1998. Apple didn’t even begin to matter until at least four years later and its Internet ecosystem took longer still to emerge. A dotcom investor in 1998 with a big stake in Apple would be like a cryptocurrency investor in 2018 with a big stake in IBM. Not real likely.
And what of the other companies — the Internet darlings — from the dotcom bubble? Here’s a representative sample of big gainers of 1998/1999:
These were huge. These were the Dogecoin, Lumens, Ripple, the Dash, the ZCash, the Monero, etc. of their day. You were nobody if you didn’t know and own them. Recognize them? Maybe a few. Use them today? Of course not. They were gone after the bubble. Gone. And there were hundreds more.
But being first matters!
Nope. Not really at all. Netscape was the first commercial web browser. Think about that. Undergraduate computer science assignments today might include coding up a basic browser. Netscape. Very cool new thing. Big IPO, big excitement. But you didn’t have to be Bill Gates to know it would be easily displaced. How many people remember when AltaVista was the best search engine? I do.
It’s worth pointing out at this point in time, today, you can create your own cryptocurrency by putting relatively minor edits to open source code from GitHub.
Best not ask how many of today’s trading cryptocurrencies are little more.
But owning just one winner makes up for lots of losers. Diversify and you’ll be fine. Right?
One serious winner with 25x or 100x gains will make up for a multitude of clunkers. If you happen to own the one winner. And, assuming there even is one.
If you buy into a new tech before any of the eventual winners show up, you are out of luck. Are we in the crypto equivalent of 1996 or 1999? Your guess is as good as mine. But if it turns out that it’s 1996 for cryptos you are pretty much screwed. In 1996, none of the eventual Internet big winners existed yet. And damn few did even five years later.
The one survivor that everyone points to from the dotcom days is Amazon. But remember, by 1999 Amazon had an actual business with millions of users. In 1999 Amazon was a useful and better new way to do something people already did. Amazon was showing real success converting users to the new way.
That is not true for one single company (company? token?) today in cryptocurrency. Not one. There are only demonstrations of potential practical use, and no real need, for any of it, not even for bitcoin, not even for Ether. I agree there will likely be in the future — but today there is not.
If you don’t believe me, go try to use one of the crypto-powered services for video sharing or data storage. What you’ll find are vaguely functional prototypes at best. WAY too early for investors to take seriously. Way. Too. Early.
In 1999, Amazon’s strategy was showing it had legs and was on its way to changing how we shopped. All we have today with cryptocurrencies are hypothetical use cases that could one day change the way we do things. None have yet presented evidence they will actually do it.
During the dotcom bubble, lots of worthless stocks soared 200%, 300%, 600% and more. Many investors took a round trip from zero up — and back down again. Smart investors took some of the gains off the table on the way up. Did they worry about selling at the top? Hell no. Smart investors know they can’t.
Smart investors know that when something with no clear value hands you a 500% gain, you take some money and put it in your pocket. That way, you can reinvest those profits later on.
That is how you get rich in a bubble. Not by buying a bunch of junk and sitting on it. A portfolio of different kinds of crap is not diversified. It is just several separate piles of crap.
It was easy to see in 1999 that eToys, Pets.com, theglobe.com, etc. had no real business. If you owned their stock and watched it triple, good for you. If you sold after the triple, even better for you.
After the crash came we began to see what companies were worth owning. If you were really smart you bought after the crash, using your profits from selling the crap before everyone else realized it was crap.
Or — you could always hold on to the crap and let it go back to zero. Your call. Many did.
In the dotcom days, the problem wasn’t excitement. The tech was exciting. The problem was too much excitement, too early — just like with cryptocurrency.
What about the other big names in tech today? What if you had held them through the bubble? Google, Facebook, Netflix?
They either didn’t exist or weren’t public so you couldn’t buy them during the bubble. There was still too much to learn. Same exact thing is true today with crypto.
Apple? It was a complete outsider in the early Internet boom. It wasn’t part of the story until much later.
Facebook? Zuckerberg was in 6th grade.
Netflix? Their name said it all. We all knew they would stream content one day. But first — for many years — all Netflix could do was let you pick your movie on their web site then send you a physical disc via snail mail.
Pretty much sums up most blockchain projects today. Their white papers tell you what they someday hope to do — today they mostly do nothing. You could have waited years before buying Netflix and done just fine.
We are still figuring out exactly how blockchain technology is going to commercialize. The fact that there are no commercially functional cryptocurrency applications should tell us something. The best applications likely do not yet exist. Not to mention, we have no idea what kind of indirect opportunities will follow as cryptocurrencies mature.
Infrastructure companies were huge gainers when the Internet really took off. After the bubble. When the serious business began.
What is the crypto equivalent of Cisco? Don’t know the history of Cisco? Google it. And by the way, there was no Google yet then either.
In the dotcom days, it was uncool to care about profits. Sound familiar?
Cryptocurrencies and ICO tokens resemble real businesses even less than early dotcoms.
I know this may be hard to believe but it’s quite true. In 1998 and 1999 you were a complete loser if you so much as brought up the question of dotcom profits. Dotcoms were all about how the Internet would change everything.
The potential was so big, you were a fool to fuss about profits. It was all about staking out early ground.
In 1998 it was impossible to go to a party without meeting some guy looking to shout someone down with his rant about how Cyberian Outpost or eToys already won. They were first and things were changing so much and so fast that first was all that mattered.
Fast forward to 2018 and that guy is expounding on how Spudcoin will decentralize French fries or bitcoin is the new dollar.
Do yourself a favor. Listen and smile. Own a modest amount of these cryptocurrencies, sure. It’s a good place to put a little money you never care if you see again. If it grows 10x then perhaps sell some and take a profit. Reinvest that profit in something safer. Or buy yourself something nice.
And wait.
Sell when you see huge multiples on your investment. Buy when everyone else is crying.
Most of the people with huge gains in cryptocurrency have never experienced this before. Huge growth tends to cloud judgment. That’s OK, any good bull market needs a healthy crop of fools.
Don’t be one.
Good discipline suggests taking profits if an asset with high volatility and limited liquidity returns 5x or 10x. Sure — it might go up more. But it already went up 5x or 10x and most venture capitalists work their butts off for those kinds of returns.
But if you do sell and take some profits, don’t forget what you learn in the early days. The underlying technology is here to stay. As an early participant you learned much. You are well positioned to pick up survivors when prices are lower.
Prices will drop, technology will begin to take shape, bargains will appear. This is a game changer and it’s a very long game. Don’t peak too early.
Don’t let irrational exuberance keep you from setting aside money to buy when irrational dismay sets in.
The emperor is naked. Tell your friends.
I’m a curious nerd and I truly believe that blockchain and cryptocurrencies are here to stay and will change the world.
But I’ve yet to read an ICO white paper that is not naive — or pathetic — puffery at best, outright chicanery at worst. It’s bound to end badly.
The crypto/blockchain world has gotten way over its skis. Many people who are lucky enough to hold profits from their early speculation will fail to take them. And those profits will go back to zero.
That’s a shame. Believing in something new is a good thing. Ignoring or misreading history is not.
Caveat emptor.
The opinions expressed here are just that — mere opinions. I am an individual and I neither give, nor seek, nor profit from, investment advice. This opinion column is to encourage thought and debate. Nothing more. Any decision you make to buy, sell, not buy, not sell, or do otherwise are yours and yours alone.
Post Script, January 10, 2023. I just reread this, five years and one week after publishing it, and there’s really not anything I would change, after all:
But fortunately, my take in 2018 is still my exact take today. These technologies need to get through their version of a dotcom bubble. The Alameda/FTX debacle is just playing out as I write now. Is that enough to get the SEC involved, get regulation in place, and give crypto a stable start? I hope so. How long will it be until the needs of new things the world wants to do digitally catch up with what crypto offers? I’m guessing 2 to 3 years from whenever a reliable regulatory regime for exchanges gets done. We’ll see.
