The Dot Com Bubble Peaked at Three Trillion Dollars

About 17 years ago, CNN published an article titled, “The $1.7 trillion lesson.” It was a recap of everything that went wrong during the bubble and what lessons were learned. I couldn’t help but notice so many parallels to the cryptocurrency markets.

“The combined market values of the 280 stocks had fallen to $1.193 trillion currently from $2.948 trillion at their peak, a loss of $1.755 trillion, most of which occurred between March and September of this year.”

Today (8/18/17), Coin Market Cap has the total network value of cryptocurrency at ~$144B. This is a long way from the nearly $3 trillion peak that the bubble hit. It was much easier for the lay person to buy stocks in the 90’s than it is for people to purchase cryptocurrency today. Additionally, issues such as storing private keys and the volatility of the asset class means many people are still staying on the sidelines. When the hot dog vendor in Manhattan tells me he has a tip on a token, then I’ll be worried about the bubble popping.

“Of the 280 stocks in the index, 79 are down 90 percent or more from their 52-week high. Another 72 are down 80-89 percent. Only five are down less than 5 percent.”

When the bubble does pop for cryptocurrency, I see many tokens going to 0. I wouldn’t be surprised if there are ~1500 tokens on the market right now. Of those on the market, I could see 10% actually surviving. One of the biggest differences between tokens and companies that IPOed during the bubble was that there was at least some barrier to entry to IPO. There is a very little barrier to entry to create a token. There is a token called Useless Ethereum Token. It does literally nothing but is worth ~$130K. Of course, is it really liquid? It exemplifies the concept that literally anyone can create a token. Few tokens are truly useful. The problem is that people are using tokens for fundraising when it’s a product feature to help bootstrap a network.

“The collapse of the Internet bubble, perhaps one of the largest financial fiascoes in U.S. history, came after a three-year period, starting in January 1997, when investors would buy almost anything even vaguely associated with the Internet, regardless of valuation.”

I don’t think things are this bad yet for crypto markets, but when you mention you are doing a token sale, suddenly you can raise a million dollars. In 1999, the average IPO was raising $83M and the total amount raised was $24B. This is ways away from the average token sale raise. According to Smith + Crown, the average raise is $2MM (The data is a bit out of date, but I don’t think the average raise has gone up exponentially since the data was released). I am reminded of this Silicon Valley clip (video below) when Erlich mentions VR and suddenly everyone wants to invest. I think it’s a bit unfair for me to compare token sales to IPO because the logistics of both are quite different, but it’s still an interesting data point nonetheless.

“Whenever a new technology comes along that has the potential to dramatically change the competitive landscape, hundreds of companies are formed to try to exploit that opportunity, including many with weak management or poorly thought out business plans. Intense competition ensues, returns on capital fall, and most of the new entrants either merge or go bankrupt.”

As I said above, not everything needs a token. Industries that I think will benefit from a token such as storage already have 3 prominent tokens (Sia, Storj, and Filecoin) and I’m sure there are more to come. Industry growth goes through 4 stages: emerging phase, growth phase, mature phase, and declining phase. We are still in the emerging phase and believe it will take 2 years before we get into the growth phase. Many tokens won’t have the runaway to get to the next stage. Some of the people starting companies see $$$ and understand little about crypto. One of the most comical token sales is Paragoin Coin. Check out their announcement video.

I’ll go on hunch here, but I don’t think that token will be successful. I’m sure the 10 C-Level executives that work for the firm will make some money at the expense of people who participate in the token sale. I’m sure there are hundreds of other Paragon Coins out there.

"As the shakeout continues, we continue to believe that the Internet spoils will go to the few, not the many," Blodget wrote. "As one investor we respect put it, anytime a new industry emerges, many turtles hatch, few make it to the sea."

I love the quote, “Many turtles hatch, few make it to the sea.” Due to the way networks work, most of the gains will occur on one token per industry. It’s possible that occur victors emerge, but they won’t have the huge outsized gains compared to the winner in the space.

"There are still an incredible number of opportunities that will get funded related to the Internet they're just different," said PricewaterhouseCoopers' Bengston. "We're in the second inning of a nine-inning game. The Dells of the Internet business have not even been founded yet."

And finally,  blockchain is still an emerging technology that very few people understand and how it could impact the world. However, many people (maybe irrationally) do believe that it will have an outsized impact on the world in the same way the internet did. We still have a lot of value that is left to be created. Even after this bubble does eventually pop, the second wave of emerging blockchain companies will also create trillions of dollar values. Bitcoin has existed for 9 years and much of the world is skeptical. We are still definitely in the second inning of a nine inning game.