How Is a Bitcoin Like a Dot Com?
At the beginning of December, I wrote about the incredible rise of Bitcoin. But even as aspiring miners rushed to PC stores, causing a graphics card shortage in their eagerness to cash in on the boom, financial experts warned of an inevitable crash. It hasn’t happened yet, but oh, how those warning signs are looking bigger and brighter than ever. In fact, the Morgan-Stanley experts are comparing it to the Dot Com Crash of the early 2000s – except everything is happening fifteen times faster.
The quick and easy explanation of the Dot Com bubble goes like this:
In 1997, a number of businesses began to emerge and exist solely on the internet. These companies were known as “Dot coms” after the top level domain most of the websites used. Today, this sort of thing is pretty commonplace, but back then, this was a new and exciting concept, so investors started to throw money at basically any and all internet businesses they could find, regardless of their future prospects.
As mentioned before, the main difference between Bitcoin and the Dot Com bubbles seems to be the time frame they’re operating in. The Dot Com boom hit its peak in 2000, three years after people first started investing. When did it crash? 2002. Yes, the Dot Com bubble lasted for a grand total of five years while the Bitcoin will be lucky to make it a year. This coming April will represent seven months since the boom began, and Bitcoin’s value is already down to $8,000, half of what it was in December.
So what’s going to happen when Bitcoin finally meets its untimely demise? The last great financial bubble burst, the housing market crash of 2007, left us millions of dollars in debt and pulled America down into a recession. We’re still feeling the effects of the crash today, as the number of homeowners has significantly decreased. Unfortunately, as the amount of renters has increased over the past ten years, so has the cost of rent, but incomes haven’t been rising to match.
This graph from mauldineconomics.com shows how the Bitcoin bubble compares to the Dot Com bubble. You can see how quickly and dramatically Bitcoin’s value has been escalating.
However, while the Dot Com burst still left many investors out millions of dollars, a lot of infrastructure was left behind that supports the internet that we know of today. Fiber optic cable networks and 3G mobile computing are a few of the technologies produced purely because dot coms needed consumers to be able to access their websites. A few dot coms even lived through the crash and still thrive to this day! You might know a few of them; do Amazon, eBay, and Expedia ring a bell?
People will lose money on this burst bubble. That’s what happens when bubbles burst. But since Bitcoin, as a currency and by design, is decentralized and in no way tied to any government, it’s not likely to trigger a recession like the Dot Com and Housing Market crashes caused. At most, miners will only lose the amount of capital they invested into Bitcoin, plus or minus the amount spent building and power mining rigs. So while the stock and trade value of Bitcoin will crash, the technology and innovation inherent in the cryptocurrency will still remain.
Still aren’t sure how Blockchain works? This diagram from pwc.com shows how blocks of data are transferred between users.
You see, blockchain technology has applications outside of being a decentralized currency. For example, Kodak announced that it would be releasing its own “cryptocurrency,” KodakCoin, in order to help artists manage and enforce image licensing policies. But that is not the only non-cryptocurrency use of blockchain systems. It can also be used for record management, cyber security, and Internet of Things tracking. So even after the Bitcoin bubble bursts, the overall impact is going to be relatively small, with a few more positives coming out of it than negatives.
Still, some people aren’t ready to let go of the iea of Bitcoin revolutionizing the finance industry, even if many retailers and big name companies like Stripe, Steam and Microsoft aren’t accepting them as a form of payment. With good reason. While it’s possible that the cryptocurrency’s violent market fluctuation will eventually calm down, I’m still not convinced there’s any money in it. But much like the dot com burst of 2002, I do think that the infrastructure left behind in its wake will lead to many exciting new technologies.