The infamous .com IPOs and the recent cryptocurrency ICOs, Google and Ethereum, Microsoft and Bitcoin, 1999 and 2017 and so on and so on… We can draw several parallels with the euphoric years of the late 90’s in the dot-com segment and today’s blossoming cryptocurrency-blockchain industry. But before we get overly excited about the parallels, we also have to add that although history often rhymes it never repeats itself.
The Number of Technology IPOs before and after the Bubble
There are also huge differences in the structure of the two booms, starting with the more fundamental importance of the Internet as an infrastructure and the money properties of the coins besides their business value. That said, basing one’s investment strategy on past patterns, be it price or behavioral ones, is far from being foolish. Heck, most super-investors and top traders do that for a living; and a good one for that matter.
The recent evolution of the number of ICOs (Source:www.techcruch.com)
So are we there yet? Should crypto-investors be worried? Are we at the end of a hype cycle? Let’s look at what we can learn from one of the most devastating bubbles of our lifetime.
How it all Started
Let’s try to understand the logic behind the dot-com boom first. It started with a regime change, much like the introduction of the blockchain technology. People, rightfully so, thought that our lives will be nothing like before the internet, although most of them were a bit off with the timing of those changes, and some of the wildest predictions are still yet to materialize. So, in short, a lot of bright minds saw the revolutionary nature of the connected world way before it changed the way we live and interact with each other, let alone before companies were making a meaningful profit in the segment.
The Dynamics of a Revolution
That realization slowly “infected” the perception of the general public, and that had a profound effect: everyone was convinced that the internet will be everywhere in 10 years, and that led to a buying frenzy in everything that had .com in its name no matter of the concept, the business model or the viability of the project.
Here we are in 2017, and the prophecies regarding the internet have basically come true. Also, there is a ton of things that we couldn’t imagine in 2000 that exist now, based on the technology. When I waited 20 minutes for a short MP3 download, probably I had no Idea about HD streaming services and the internet of things that are common things as of now.
And that’s not a new thing too; the real technological revolutions have huge potentials that are at least in part unforeseen in the early days of the boom. This was the case with computers, electricity, the internet, and probably all the major technological revolutions.
In the case of the blockchain technology, we are probably somewhere where we were with the Internet around 1999. Even the biggest bears admit that the technology is here to stay, and it will be used in a wide variety of industries on a daily basis while having possible applications in now unimaginable fields as well. This should mean that the segment has a bright future ahead and as whole its capitalization will probably rise dramatically from here.
So if the industry has a similar path ahead of it, we have to look at what caused the steep losses for the late investors of the .com boom, and at the possibility of the same thing happening with cryptocurrency investors?
Markets Run Ahead of Themselves
There were two key reasons of the .com bubble and the following bust (granted, we have the benefit of hindsight); first the realization of the revolution came well before the industry matured enough to generate profits anywhere near the amounts that would have justified the lofty valuations that existed towards the end of the bubble.
The second reason is the unconditional buying that was the norm among investors during the late phase of the bubble. If we take a look at the real winners of the internet boom (like Google, Amazon, Microsoft) and the participants of the industries that grew out of it (Apple, Netflix, Facebook), the outlandish projections were not so exaggerated after all, with the segment providing the majority of the most valuable companies today.
Global Capitalization List in 2017
That said, a large percentage of the .com companies simply didn’t make it. They failed partly because the vicious competition that investors conveniently ignored, partly because the ideas themselves were not viable, and of course partly because of the fraudulent IPOs, which were only created to milk the unstoppable flow of capital.
The NASDAQ and the Dot-Com Bubble
Now that the NASDAQ is finally at all-time highs, after 15 years of “correction” mind you, investors shouldn’t forget about the companies that are non-existent or at least are not a part of the indices and faded into oblivion. All in all, a large number of investors are still under water nominally, not to mention the real, inflation-adjusted value of the investments placed in 2000.
The Lessons to Learn for Cryptocurrency Investors
With the above in mind, the current state of the cryptocurrency segment has several dangerous components apart from providing very promising opportunities. One of the earliest and most persistent crypto-bulls called Cryptocurrencies the bubble of his lifetime, as the rally of the past few months catapulted the coins’ market value above the $100 billion mark.
Total Value of Cryptocurrencies in 2017 (Source: Coinmarketcap)
The segment’s market capitalization increased 5-fold since the start of the year, and now the gains were shared equally between the largest coins and the smaller players of the segment, as investors rushed to take part in the enormous gains of the cryptocurrency market. The ICO boom definitely resembles the IPO craze of the late 90’s. New coins are popping up in every imaginable sector, and a lot of new investors are piling in, mesmerized by the stellar gains of the whole market.
On the other hand, the attention given by the investing public to coin offerings is nowhere near the levels of the .com bubble and the major players participating in the field are few and far between. That could mean that the top of the current bull market is far away, as there is a huge potential of additional buyers let that could fuel the rally. Still, investing consciously and being selective with long-term holdings will always be rewarding and blindly chasing the market higher will always be dangerous to your financial wealth.
Bitcoin’s market cap compared to enormous size of the global economy (Source:Howmuch.net)
How To Invest in a Revolution
The already mentioned Novogratz still holds 10% of his wealth in cryptocurrencies, while calling it a huge bubble, and he urges all investors do so themselves. For sure that 10% is almost laughable for some, who might have the 100% (or even more through leverage) of their savings in the segment, but for a diversified portfolio, it’s still a lot.
He is trying to maintain that level of exposure, so he uses advances to reduce his positions and loads up again if prices are tumbling. And oh boy, they can tumble… Just recently, Ethereum (the second largest coin) completed a 50% correction while also falling 75% in 2016. For leveraged players, those dips most likely meant the end of their portfolios, but with a 10% rebalancing rule (or a more aggressive 20% one) they were great opportunities to buy in again.
The Volatile Bull Market in Ethereum
Of course, if we take warnings of the NASDAQ on face value—that the popping of the bubble can mean a decade-long correction for the industry, rebalancing won’t do the trick. A selective approach is as, or even more important as controlling your exposure.
If you think that the Ethereum (or maybe Stratis or Neo) network will be the backbone of the blockchain universe than probably putting your money in it and forgetting it for 10 years (or adding a certain amount every month) will be a more than simply lucrative strategy. Also, if you think that Bitcoin (or one of its competitors) will really take over, at least a part of the role of gold as a hard. Safe haven currency, the heights that that currency might reach are unimaginable.
Apple (AAPL) Before and After the Dot-Com Bubble
Combining thorough research, common sense, and money management should be the way to go (start with our ICO analysis series for example) while using some of the old and tested investment rules will likely not hurt.
What’s Next for the Cryptocurrency Market?
So are we calling a top here? No, we are not. We are just trying to warn investors that there is no substitute for conscious investments if you are in for long-term gains, and that you have prepare for the unexpected when it comes to financial markets. If those who think that the segment is in a bubble are right, those blindly buying ICO’s might be in for a rude awakening when the bubble pops.
The good news is that if you do your research and choose the coins to invest in wisely, the blockchain-megatrend will save you from losses and multiply your investments even if you happen to buy right at the top of the bubble.
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