What the dot-com bust can teach us about cryptocurrency

Economist Benjamin Graham, known to some as the father of value investing, once compared the market to a short-term voting machine and a long-term weighing machine. While Graham would probably at best have been skeptical of crypto and its inherent volatility had he lived to see it, his economic theory still applies to certain aspects there.

Since the advent of altcoins, the blockchain site has functioned almost exclusively as a “voting machine.” Many projects have largely been financially unsuccessful and even detrimental to investors and space in general. Instead, they have turned crypto into a memelord popularity contest, and their success on that front can hardly be underestimated. Sometimes that competition is based on who promises the best future utility case – but whether that future actually comes is another matter. It is often based on who markets themselves best, through sophisticated-looking infographics or ridiculous symbol names and a series of associated “dank” memes. Whatever it is, the success of most projects is based on speculation and little else. This is what Graham referred to as the “voting machine.”

So, what’s wrong here? Many foresighted people have made life-changing money while playing the game, and the constant talk of funding and building potentially world-changing decentralized technology is the norm, so it seems like space can be an ideal environment for founders and developers, right? It is not. These successes have often come at the expense of unsophisticated, desperately misguided beginners. Moreover, most of this value falls into the hands of the ubiquitous so-called vaporware merchants who propagate little more than misplaced value and broken promises. So, where is Graham’s weighing machine, and when will it take effect? As it happens, right now.

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Cryptocracy versus dot-com bubble

The dot-com bubble is an ideal historical precedent for our purposes. The two areas share an abundance of shoehorns that develop technology into problems that do not exist, excessive access to capital, ambitious promises without hard technology to support them, and finally, a gross misunderstanding of what some of this is even about from its investor page (see domain requirements for pets.com, radio.com, broadcast.com, etc.)

Why did these companies ever get mercy? Simply because they had obvious names. If the bulk of investors do not understand what they are buying but want to join the party, why not choose a direct name?

Related: Are you still comparing Bitcoin to the tulip bubble? Stop!

Besides, the numbers are eerily similar. Let’s put these in perspective:

• In 2000, the dot-com sector peaked at $ 2.95 trillion. Accounting for inflation, it would be $ 4.95 trillion at the time of writing.
• It then fell to a low of $ 1.195 trillion. Accounting for inflation, it would be $ 3.27 trillion at the time of writing.
• The total market value of crypto reached $ 2.8 trillion. Accounting for inflation, it would be $ 1.67 trillion in 2000.
• It is now at a low of $ 1.23 trillion. Accounting for inflation, it would be $ 0.073 trillion in 2000.
• The delta between the tops of the dot-com bubble is 59.5% from high to low.
• The delta between the top of the current crypto bubble is 56% from high to low.

Inflation will skew these a bit, but take a moment to consider that Apple alone has a market value of 2.45 trillion dollars at the time of writing. A single stock in the technology sector has the same market value as the entire crypto and half of the dot-com sector when adjusted for inflation.

Speed ​​breeds volatility

As bleak as that downturn seems, there is no tragedy. Imagine knowing that the market bottom had been reached for the technology sector in 2003, for example. People were convinced that the technology sector was on its last legs. Sure, the numbers above can (and should) be taken with a pinch of salt, and one can remember that history does not always repeat itself exactly – instead it rhymes. Since I joined the blockchain area in 2016, I have seen it move faster than almost any other financial sector. The patience required to wait for a cryptocurrency decline requires far less strength than the wait between 2003 and 2010.

In recent months, crypto has simultaneously pulled the shortest straw from macroeconomic forces and experienced another “black swan event” such as Mt. Gox, the crypto winter of 2017–2018 and crashed in 2020. This time it was a Terra crash.

Each of these events spelled doom, ruin, plague, and death for the average investor; Nevertheless, developers continued to evolve, miners and node operators continued to operate, and smart money continued to buy. (Funds like a16z, StarkWare and LayerZero raised about $ 15 billion in total quite recently). Why? Emotional decisions that affect one group do not necessarily affect all the others. One of these datasets is subject to it, while the other has conquered it. These are individuals and entities that do not feel bad about beating you. They do not feel bad about making you lose money. They do not feel anything until they have realized a loss point. In other words, emotions must inherently be removed from the equation with regard to decision making.

Related: Disconnection manifesto: Mapping of the next phase of the cryptocurrency journey

How the Terra saga affects you, and what comes next

Chances are high that the Terra crash will continue to ruin your portfolio and peace of mind. Meanwhile, the ever-present stoic investors are raising their ugly heads, having sold the top just weeks ago and let you plunge to a 70% loss. But do not panic. Look at the history of the internet and consider this instead. It is difficult to say exactly where we are in the crypto market adoption cycle and how far we are from when it really trims the fat. However, it seems that we are very close, and things are going much faster than the dot-com sector did.

All of this provides a reasonably simple framework for some intelligent long-term investment strategies – especially if you take into account the way more and more average users are using Web3. If broadband was the encouraging event that led to massive user growth, I would argue that a user-friendly Web3 wallet that does not require any setup to interact with a number of blockchains would be the crypto analogue event. Interestingly, Robinhood recently announced that it would soon release an easy-to-use Web3 wallet. When such a solution arrives that enables Web3 interaction with just a few clicks, the locks open completely.

From there, it is a matter of deciding what the blue chips sitting in the top 20-30 market values ​​of crypto will be, and then buying and just being patient. The problem is that there are no guarantees, except in retrospect, and the closer a market approaches the maturation point, the less upside is available to the investor. The most sensible thing to do is to take the time and approach to invest in a new room like this with a clear, defined strategy.

This article does not contain investment advice or recommendations. All investment and trading movements involve risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.