Dot-Com | A bubble that burst, the big bang and the future
History is always present reminding us of the good and the bad. Dot-Com’s story is about a real financial bubble burst which caused an even bigger economic damage than 9/11 attack on America.
The cost of damage to investors was 5 trillion dollars!
Below, we will dive into how this economic damage occurred, what were the mistakes that happened even from experts with years of experience, which companies were utterly destroyed or barely survived and finally if there is a possibility that this damage will happen again in the future.
A new framework for new ideas and opportunities was created back in 1990 with the creation and use of Internet. As proven many years later, a lot of people got too excited and used this new technology as an opportunity to start new innovative businesses (ex. Electronic stores). The “hype” also hit the door of the ambitious investors, who thought that these new start-ups will make them millions. Investors weren’t wrong but there was one tiny miscalculation in their formula.
The hardware of this era (computers, phones etc.) could not provide many features and also people were not accustomed to buying online.
It was the beginning of the end!
The Beginning
In 1993, the physical world is introduced to Mosaic, the new browser who connected the gap with the web world. With the use of Mosaic, Personal Computers transformed from a luxury to an everyday job/house tool. Netscape Communications Corporation, an American independent computer services company, took this opportunity and launched a new web browser called “Netscape” for free!
Mosaic was not free, thus the first web browser war started!
Within the first year of release, Netscape became so famous that the Netscape Communications Corporation went public with a stock price of 28$.
The same day the stock price skyrocketed to 75$ per stock!
Netscape’s stock success shocked the world!
Many people around the earth saw an economic opportunity and wanted to invest in this “gold mine”.
As time went by, more and more investors were investing in the new internet-companies.
Most of these companies barely made any profit and went public in the Nasdaq stock exchange.
So, these companies, instead of focusing to bring sales did the exact opposite by spending huge amounts of money on ads, with a general goal of beating their competition and acquiring a percentage of the market.
For some odd reason everybody stopped paying attention to logic and kept investing more on this profitless companies.
In 2000, the US Federal Reserve feeling relieved that the well-known Y2K Computer Bug solved, announced plans of raising interest rates. Market was in turmoil and most analysts debated whether internet companies would be affected by higher borrowing costs.
Moreover, a few days before that, Japan economy crushed. All that turn into a global scale crisis and most investors started selling theirs stocks.
Now, no one was interested on buying more stocks and soon that lead to the burst of the bubble!
By the autumn of 2000, internet’s stock prices dropped 75%!
The majority of the “Dot – Com” companies started closing one after the other, with only a few exceptions.
The main reasons that led to the Dot-Com financial crisis
The Dot – Com economic crisis can be explained with the following question:
What can greed do to a person?
It is not accustomed for investors to behave like this!
Reason 1: Spontaneity without an investment strategy
Most investors out of the blue forgot the basic rules of investments, like market & trends research, business plans reevaluation etc.
Reason 2: Reinvestment only on Ads
Internet companies did not focus on sales but invested deeply on ads without paying attention to more logical strategies.
Reason 3: Overpriced Stocks
Analysts overvalued these shares leading to highly overpriced stocks.
The Survivors
Every economic crisis has winners and losers.
In this case, some of the internet companies managed to survive!
One of these companies is Amazon, who is still here after 20+ years and is one the biggest companies in the world. Jeff Bezos, the founder of Amazon, chose to invest in a long-term growth plan which came to be a good choice in the future!
Other companies followed that example like eBay, Priceline, Shutterfly and Coupons.
The Future: What’s in store for the post-Dot.com era?
Από το 2000 μέχρι και σήμερα έχουν προκληθεί και άλλες οικονομικές κρίσεις όπως το 2001 η 11η Σεπτεμβρίου, το 2008 και πολύ πρόσφατα το 2020 με την πανδημία Covid-19 να εξαπλώνεται σε όλο τον πλανήτη.
More economic crisis occurred since 2000’s. The 9/11/2001 crisis followed by 2008 real estate crisis and the most recent one in 2020 by the Covid-19 pandemic.
The question is:
“Can a Dot – Com Bubble happen again?”
The answer is simple. Yes.
But the reasons behind cannot be explained in an article.
There a lot of things that can lead to economic crisis like war, a black swan event or even a new technology like AI.
This time we have a lot of examples from recent history, free knowledge on how markets behaves and tools that can help us avoid personal economic crisis. So be careful when you invest and follow the rules to avoid getting caught from the crisis wave.