What the dot-com bust can teach us about the crypto crash

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

Since the emergence of altcoins, the blockchain space has acted almost exclusively as a “voting machine”. Many projects, broadly speaking, have failed financially and are also detrimental to the investors and the place at large. Instead, they have turned crypto into a memorable popularity contest, and their success on that front can hardly be underestimated. Sometimes that competition is based on who promises the best future use case – but whether that future actually arrives is another issue entirely. Often this is based on who markets themselves best, either through sophisticated looking infographics or a series of ridiculous token names and related “dank” memes. Be that as it may, the success of most projects is based on speculation and little else. This is what Graham was referring to as the “voting machine”.

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So, what’s wrong here? Many presenters have made life-changing money while playing games, and constant talk of funding and building decentralized technology that will potentially change the world is the norm, so it seems the space could be an ideal environment for founders and developers alike. is it, isn’t it? It is not. These successes often come at the cost of unsophisticated, desperately misguided investing crooks. Furthermore, much of that value ends up in the hands of the ubiquitous so-called vaporware traders who promote little more than false prices and broken promises. So, where is Graham’s weighing machine, and when will it start to apply its force? As it happens, now.

related: The Decoupling Manifesto: Mapping the Next Stage of the Crypto Journey

Crypto Crash vs. Dot-Com Bubble

The dot-com bubble is a perfect historical precedent for our purposes. The two spaces share shoehorn developing technology into problems that don’t exist, excessive access to capital, ambitious promises of no-hard technology, and, ultimately, a blatant misconception about any of it. Investors (see domain claims for pets.com, Radio.com, Broadcast.com, etc.)

Why did those companies ever profit? Simply because they had obvious names. If a bite of investors doesn’t understand what they’re buying, but want to join the party, why not choose a point-blank name?

related: Do You Still Compare Bitcoin to the Tulip Bubble? pause!

What’s more, the numbers are supernaturally similar. Let’s put these in perspective:

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

Inflation will skew these a bit, but take some time to consider that Apple alone is on a $2.45 trillion market cap at the time of writing. A single tech sector stock has the same market capitalization as all crypto and half the dot-com sector when adjusted for inflation.

Velocity forgets volatility

As depressing as this recession sounds, it is not a tragedy. Imagine that in 2003 the market bottom for the tech sector was reached. People were convinced that the technical sector was in its final stages. Certainly, the numbers above can (and should) be taken with a heavy grain of salt, and one can remember that history doesn’t always exactly repeat itself—instead, it rhymes. Since entering the blockchain space in 2016, I have seen it grow faster than almost every other financial sector. The patience required to wait for the crypto recession requires much less patience than the waiting period between 2003 and 2010.

Over the past few months, crypto has simultaneously pulled the shortest straw from macroeconomic forces and experienced yet another “black swan event” like Mount Gox, the 2017-2018 crypto winter and the 2020 crash. This time, it was Terra accident.

Each of these events spelled doom, doom, plague, and death for the average investor; Yet somehow, developers continued to develop, miners and node operators continued to operate, and smart money continued to buy. (Funds like a16z, StarkWare and LayerZero have recently raised about $15 billion combined). Why? Emotional decisions that affect one group may not necessarily affect all others. One of these data sets is under it, while the other has conquered it. These are individuals and entities that you don’t mind beating up. They don’t feel bad for losing you money. They don’t feel anything until they realize the loss – full stop. In other words, emotions should naturally be removed from the equation in relation to decision-making.

related: The Decoupling Manifesto: Mapping the Next Stage of the Crypto Journey

How the Terra Saga affects you, and what happens next

Chances are, the Terra crash will continue to wreak havoc on your portfolio and peace of mind. Meanwhile, the ever-present foolish investors rear their ugly head, selling the top just a few weeks ago and letting you fall in a 70% loss. But don’t panic. Look at the history of the Internet and consider this instead. It’s hard to say exactly where we are in crypto’s market adoption cycle and how far along we are when it comes to actually trimming the fat. However, it seems that we are very close, and things are moving much faster than in the dot-com sector.

All of this makes it a reasonably straightforward framework for some intelligent long-term investment strategies – especially if you pay attention to the way in which more and more average users are adopting Web3. If broadband was the inciting event that led to massive user growth, I would argue an easy-to-use web3 wallet that would require no setup to interact with multiple blockchains would have a similar phenomenon to crypto. Interestingly enough, Robinhood recently announced that it will be releasing an easy-to-use Web3 wallet really soon. Once a solution like this comes along that allows Web3 interactions with just a few clicks, the floodgates will be fully open.

From there, it’s a matter of determining what will be the blue chips sitting in the top 20-30 market capitalizations of crypto, and then buying and just being patient. The problem is that there are no guarantees, other than just retrospectives, and the closer a market gets to maturity, the less upside is available to the investor. The most prudent thing to do is to take your time and invest in a new place like this with a clear, defined strategy.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.

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

Axel Nussbaumer He is the vice president of digital asset management at Dallas-based bitcoin mining company Blockmetrics. Before becoming an entrepreneur in 2015, he studied business at Southern Methodist University and worked for a Texas-based private equity fund. In 2016, he focused on blockchain technology. His early interest and involvement in the space has led to many successful investments and a wealth of experience and knowledge, which he has provided in publications such as Nasdaq and Forbes.