In the late 1990s, investors cheered as their stakes in an unproven technology with vague business plans climbed to unprecedented heights — some soared more than 2,000 percent — only to crash to next to nothing, or actually nothing, just a few month later.
In no time, people weren’t just questioning the stock prices or their investor’s sanity, they began to attack the underlying technology that served to inflate this bubble itself. The internet was just a phase, critics charged. It couldn’t really lead to a change in how people actually behaved.
The parallels between the dotcom crash, which followed in the wake of the dotcom bubble, and the current crypto rise and fall are unmistakable. Both grew and plummeted at roughly the same rates, for example. And there’s a reason for this. Cycles follow similar patterns — and that’s because people follow similar emotional patterns, a spectrum that fluctuates between greed and fear.
For astute investors, who realize that history doesn’t repeat, but it rhymes, these lessons from the dotcom crash can help us learn — and profit from — what’s next.
Crypto investors should pay close attention to one particular lesson of the dotcom crash: Most investors walked away from that crash with this one, bruising lesson: never invest in another internet company again. They let their disgust at companies involved in the dotcom debacle — which probably should have partially been aimed at themselves — forever taint their near-future investments in all internet-based companies.
As a result, they missed sampling from the biggest bargains in investment history: Google, Amazon, Apple, and other companies that are now earning leaders.
Consider Amazon.com, which now sits among the most valuable companies in the world and is toying with a trillion-dollar market cap.
During the rise of the bubble, Amazon, was one of the fastest growth stocks when it IPOed at $18 in 1997. But, during the crash it went from near $100+ to a low of $6. (As an aside, this pattern is a near match to Bitcoin’s and Ethereum’s rise and fall.) You could have actually picked up Amazon for less than what it was originally priced at years before. The stock meandered among the low-end of its range for a long time after the crash as the market consolidated and as businesses began to deliver on the internet’s promise of ecommerce and social networking.
But, over time, Amazon not only recovered, it soared.
For smart investors who held Amazon — and for those who jumped in after the crash — the reward was massive.
According to Investopedia, “If you had invested just $100 in Amazon’s IPO, you would have received 5 shares. What is beyond impressive is that investment would have been worth nearly $120,762 at the Aug. 31, 2018, close price of $2012.71/sh. That would yield an increase of more than 120,000 percent on the initial $100 investment.”
Lessons for Crypto Investors
There’s no way to predict whether Bitcoin, Ethereum, and other crypto-investments will rise again, but, as mentioned, the economics of both the dotcom and crypto bubbles are eerily — and perhaps not coincidentally — similar. If so, how can investors determine whether crypto-investments will regain their traction, or which ones will recover, or fall like etoys.com and other dotcom busts?
Looking at those savvy dotcom bust investors reveals a few tips. These smart investors tended to do the following:
After taking a beating, investors may think this is obvious, but it bears repeating. Invest only what you can afford to lose, add to those investments in a responsible way, as well.
Watch The Trends Carefully
Watch price movements and watch the adoption of cryptocurrencies closely. For cryptocurrencies to return to their former heights, they will have to deliver on their actual promise of decentralized and secure information exchange.
Invest In What You See, Not In What You Believe
Many investors chose to wade back into the choppy post-dotcom bubble because they believed in Amazon as a service. They used Amazon. Their friends and family used the site. And they liked it. They saw the utility of using Amazon. For cryptocurrencies, watch what your friends and family are using, or if they are using them at all. But, it’s also important to be aware of your own biases, particularly your political biases. Just because you want cryptocurrencies to succeed to stick it to the man, the Fed, Trump, Bernie, or anyone else you deem a political target, doesn’t mean the market will follow.
Wait. But Don’t Hesitate
It’s natural to grow wary of an entire industry after a particular brutal run-up and crash. But, it’s a mistake to let that bias direct your investments forever. Investigating and testing crypto-investments is perfectly acceptable, even as they sit at near lows. As Warren Buffett says, “Be fearful when others are greedy and greedy when others are fearful.”
Many stock market experts say that shrewd financing decisions, smart management, and a focused business plan allowed Amazon.com survive the dotcom crash. Keep an eye on management teams, developments teams, innovations within the crypto-space, as well as new innovations outside that may help or hurt your crypto investments.
Finally, investing history does not repeat. Rarely will bullish and bearish patterns respond in exactly the same way, in exactly the same time period. And, often, markets never recover. But, these patterns often rhyme. The odds are good that crazy bubbles pop, consolidate, and recover. Remain open to possibilities and remove biases to act astutely.