Winter is coming.
Actually, it’s already here. After the massive crypto bull run in 2020-21, we are now back in the dreaded “crypto winter,” which is characterized by a lot of #ngmi on Twitter and a massive amount of cope. In other words, the cryptocurrency market has endured a painful price crash.
But we’ve been here before. In fact, this is the fourth sustained crypto winter since Bitcoin’s inception in 2009.
But this one seems bigger, which has many speculators comparing crypto winter with the infamous dot-com bubble of the early 2000s. And there are quite a few similarities. In the dot-com bubble there was rampant speculation, sky-high company valuations, and then a huge market crash that coincided with many companies going out of business and investors losing trillions in value.
But there are also a few key differences between the two market sectors and how these crashes have played out.
In this article we’ll be doing a side-by-side comparison of crypto winter and the dot-com bubble, and discussing how you can navigate this current environment to become a more confident crypto investor.
Crypto Winter vs. the Dot-Com Bubble
|Feature||Crypto Winter||Dot-Com Bubble|
|Inflated Asset Prices||Yes||Yes|
|Venture Capital Investments||Yes||Yes|
|Massive Ad Spend||Yes||Yes|
|Lack of Profitability||Yes||Yes|
|New Government Regulation||Yes||Yes|
|Cyclical Rise and Decline||Yes||No|
There are quite a few similarities between both markets, giving some credence to the sentiment that crypto is a bubble asset that continues to pop over and over again. But there are also notable differences in what led up to this recent crypto bubble and how the crypto market performs compared to the tech market in the late ‘90s.
Let’s break down the similarities and differences between these two markets a bit more:
There are plenty of similarities to point two between the dot-com bubble and crypto winter.
Both events were the result of new technology going mainstream and pushing asset prices way beyond normal valuations. In the dot-com bubble, there were profitless companies valued at billions of dollars even though they kept reporting quarterly losses. During the recent crypto bull run, there were many assets that grew by 100x in the span of a few days and subsequently dropped in price as early investors cashed out their coins.
Venture Capital Funding
Both asset classes grew, partly, as a result of a huge influx of venture capital (VC) funding.
In the dot-com bubble, low interest rates and large funding rounds led to some of the outlandish initial public offerings (IPOs) and stock valuations that came crashing back to earth shortly after going public. In crypto, VC firms (with the help of low interest rates, again) poured tens of billions of dollars into crypto start-up companies, giving rise to insane valuations to projects that became insolvent in 2022 (see: Celsius and BlockFi).
Huge Ad Budgets
Both bubbles had huge ad spend, with many dot-com companies spending more in advertising than they earned in revenue, and crypto companies touting celebrity endorsements and Super Bowl ads to the tune of hundreds of millions of dollars.
As winter descends on the crypto market in 2022, more and more government regulation is being pushed to help govern the crypto industry. Likewise, the Sarbanes-Oxley Act of 2002 was passed largely due to the massive fraud involved in the dot-com bubble (Enron, anyone?).
Suffice to say, there are plenty of similarities between the dot-com bubble bursting and the current crypto winter.
Although there are some striking similarities between the two asset bubbles, they are not quite the same. Here are a few of the differences between the dot-com bubble and crypto winter:
The dot-com bubble arose from interest in internet companies that now had websites with popular names, such as Pets.com. These companies harnessed the power of e-commerce and the ability to scale through the internet. But due to unsustainable business models and overvaluation, many of these companies quickly went bankrupt, and the Nasdaq as a whole lost almost 80% in value from 2000 to 2002. The dot-com bubble burst once and never came back.
Compare this cycle to crypto, which has an almost-predictable market cycle. In fact, this is the fourth crypto winter since Bitcoin’s inception, with the previous down cycles happening in 2011, 2013, and 2018.
Bitcoin is designed to become more difficult to mine every four years, and each time the mining rewards are reduced (about every four years), there is a massive bull run, followed by a prolonged crypto winter. Crypto winter is not a one-and-done phenomenon, but a regular cycle that has continued for 12 years running.
Size of Losses
This most recent crypto bull run saw the total market value of cryptocurrency rise to a level of about $3 trillion. As 2022’s crypto winter set in, the total market capitalization dropped as low as $950 million, essentially wiping $2 trillion in wealth out in just a few short months.
By comparison, the dot-com bubble grew market valuations of internet companies past $5 trillion at one point in 1999, far bigger than the crypto market when adjusting for inflation. And the crash dropped the Nasdaq by over 75% within two years, but the entire stock market crashed along with it. In total, nearly $5 trillion in wealth was erased from the bubble bursting.
Adjusted for inflation, the dot-com bubble was far more devastating, even to investors not directly participating in the industry in question.
What We Can Learn From the Dot-Com Bubble
Although crypto winter has set in, the full effects of this cycle may not be fully felt for quite some time. And if we’re comparing this to the dot-com bubble (we are), then there may be another year or two of fallout to deal with. Here are a few lessons from the dot-com bubble we can use to navigate the current crypto winter:
Regulation Will Come
After the dot-com crash, there was sweeping reform due to the financial fraud committed by popular companies, such as Worldcom, Tyco, and Enron. This tightened recordkeeping requirements for auditors and accountants to help prevent fraudulent financial reporting in public companies.
With the rampant speculation and complete collapse of many crypto companies, regulation will come, and hopefully help protect investors while leaving room for growth in the industry. Regulation stopped the initial coin offering (ICO) craze in crypto in 2018, and moving forward, new regulations will force some crypto companies out of business, while others adapt and thrive.
Regulation shouldn’t be seen as a bad thing, but as an indicator of how cryptocurrencies can grow going forward.
People Will Lose Jobs
In the dot-com bust, layoffs came in waves, to the point where many companies simply closed up and laid off everyone. Over 85,000 tech jobs were erased in two years, resulting in a 17% decline in employment for Silicon Valley companies.
Crypto exchange Coinbase recently laid off 1,100 employees, Gemini laid off 10% of its workforce, and NFT platform OpenSea laid off roughly 20% of its staff. The running list of crypto layoffs continues to grow by the week, and there will most likely be more as winter stretches on.
Unfortunately, as in all bubbles that burst, layoffs will continue. Companies may be slow to rehire, even if the market is rebounding.
Only The Best Crypto Will Survive
In the dot-com bust, many high-profile companies went out of business. Trillions of dollars in value were wiped out, and hundreds of billions in investments disappeared in a few short years. But out of the ashes, companies like Amazon, eBay, and Shutterfly flourished and saw massive growth.
Crypto winter is a self-cleansing period of time that forces the weak companies to fold and the strong ones to innovate. There will be winners that come out even stronger for the next crypto growth cycle, and there is potential for massive growth on the other end.
Keep an eye on which cryptocurrencies continue to deliver on their promises. Look for those that adapt to the new industry regulations and opportunities that arise.
The dot-com bubble was a period of unprecedented growth and almost a mania-like hype around a new technology (the internet). And history seems to be playing on repeat with the most recent growth and crash of the crypto market.
But while the dot-com bubble was a one-and-done occurrence, cryptocurrency continues to see growth and decline cycles, mostly centered around Bitcoin mining events. The most recent cryptocurrency growth got everyone’s attention though, and now Bitcoin is a household name. The recent crypto crash was far more devastating than previous cycles, too, with trillions in value disappearing in a much faster manner than in the last crypto crash in 2018.
Crypto is here to stay. The question is, how will you navigate this crypto winter to take advantage of the upcoming growth cycle when crypto companies rise from the ashes like a phoenix? Take the lessons learned from previous bubbles to inform your future investment decisions.
Remember, crypto is a speculative investment, as were the dot-com companies in the early 2000s. These investments come with the risk of loss, even the total loss of capital. Manage your risk wisely.