The Beginning and End of the Dotcom Bubble

In less than two decades, the Internet has changed our lives incredibly. From shopping to communication to news, the Internet has changed almost every aspect of our lives. And it has influenced the way many types of businesses develop. Many businesses have already earned millions of dollars through the Internet, and many more are expecting such success.
However, it was the over-optimism of entrepreneurs about the possibilities of the Internet that created the infamous ‘dotcom bubble’ in the late nineties. If you are not careful or do not plan your business properly, it is not impossible that another bubble will form in the market in the future.
What is the Dotcom Bubble?
The Dotcom Bubble is a stock market bubble that was created due to speculation or speculation in dotcom or internet-based businesses from 1995-2000. It is also known as the Internet Bubble. Most of the companies that suffered losses had a dotcom (.com) domain in their Internet addresses. The dot-com bubble was actually the result of the launch of the World Wide Web in 1989, the establishment of Internet and technology-based start-ups in the 1990s, and the rapid growth of these companies in the late 1990s. This period marked the widespread use of the Internet as a source of online shopping, communication, and news.
The dot-com bubble of the 1990s
The expansion of the Internet in the late 20th century expanded the scope of various types of businesses, and inspired people to believe that online businesses would be successful in the future. Many new Internet-based companies (known as ‘dot-coms’) were launched in the hope that the value of a company that was conducting business activities online would exceed the value of ordinary companies by several million.
However, it is clear that most dot-coms or Internet-based companies did not achieve the expected success. And those that did succeed were often overvalued. As a result, these companies collapsed, causing investors to suffer significant losses. In fact, the Internet crash accelerated the stock market crash of 2001. Overall, people’s expectations for the Internet in the mid-to-late 1990s were unrealistic and skyrocketing. Whether they were individuals, entrepreneurs, or large corporations, all Internet entrepreneurs dreamed of becoming dot-com millionaires or billionaires. These entrepreneurs were inspired by companies like Amazon, eBay, and Kozmo. But they forgot that a company doing business for millions or billions of dollars means that many contemporary companies have failed. Therefore, one should not invest in any sector without reviewing the fundamentals of the business.
Many investors ignore some of the basic rules of investing in the stock market, such as price-earnings ratio analysis, market power study, and business plan review. Instead, investors and entrepreneurs fall for a new business idea whose market potential or market potential has not yet been proven. Moreover, even though Larry Elliott, the economics editor of The Guardian, gave clear indications that the dotcom or internet bubble was about to burst, they continued to ignore it.
Some of the main reasons behind the bursting of the dotcom bubble
The following reasons can be attributed to the bursting of the dotcom bubble.
1. Overvaluation of dotcom companies
The dotcom bubble was created due to the excessive popularity of a new invention, the ‘Internet’. This internet existed even before the nineties. However, the bubble started to form when it was democratized, and as a result, many companies got the opportunity to hold IPOs. Due to the increasing demand and the lack of proper valuation models, most of the technology and internet companies that held IPOs were highly valued at that time. High price multiples are used in the valuation of internet companies. The resulting unrealistic values make everyone quite optimistic. But analysts did not focus on the fundamental analysis of these businesses, and did not consider it necessary to properly examine whether they had revenue generation capabilities or income generation capabilities. Because, these companies focus on website traffic metrics, but without any value-added.
2. Abundance of capital
One of the main reasons for the dot-com bubble was the excessive pouring of money by investors into technology and internet-based companies or start-ups. Moreover, cheap funds or funds obtained through very low interest rates made capital easily available. Due to this, it was not necessary for internet companies to acquire funds or funds. Many people started investing in this sector very easily, which further expanded the dot-com bubble.
3. Media frenzy
Media companies made investors overly optimistic about future returns and encouraged them to invest in risky technology or internet stocks with the mantra of ‘get big fast’. Various business publications, such as The Wall Street Journal, Forbes, Bloomberg, and many investment analysis publications, added fuel to the fire through their media outlets and helped inflate the dot-com bubble. A speech by Alan Greenspan on December 5, 1996, further inflated the dot-com bubble.
On December 5, 1996, a speech by Alan Greenspan further inflated the dot-com bubble. Alan, the then chairman of the US Federal Reserve, warned about the ‘irrational exuberance’ or ‘irrational excitement’ of the financial markets. This speech was supposed to stabilize the market situation. However, in fact, the opposite happened. Many began to interpret this speech differently, and began to think that it was a statement in favor of that time, the dot-com bubble.
Impact of the dot-com bubble on the economy
The dot-com bubble not only caused a mild recession, but it also shook people’s confidence in building a new industry or industry. As a result, people became overly concerned about creating new industries later on. Its impact was so severe that even many successful companies were hit by this blow. For example, Intel’s stock, which had been in the financial market since the eighties, can be said. However, when the dot-com bubble burst, Intel’s shares fell. Although the company was not directly involved in the dot-com bubble, it was affected by it. Intel later struggled to stabilize its stock price.
Overall, investors suffered more losses than the companies themselves when the dot-com bubble burst. According to The New York Times, about 48% of dot-com companies survived the dot-com bubble, although their market values plummeted. The sudden surge in IPOs by several new technology companies, including GameStop, in 2021 has once again raised concerns among investors about potential economic bubbles.
New technologies almost invariably create bubbles. While it is natural to be drawn to them due to the convenience of social media, blogging, and e-commerce, it is important to do your due diligence and do your due diligence before investing in a company or stock. It should be remembered that there is still a possibility of losing money by investing in a potential bubble. Investing in internet companies is certainly not wrong. Moreover, it is not always the case that the investor will suffer losses. But when investing in these companies, like any other company, before investing, one should look at their balance sheet and profitability without listening to any rumors.