Bitcoin: Why It's Starting to Feel Like 2000
In early 2000 after surviving Y2K mania if felt like the worlds best days were ahead. The internet was growing, companies like AOL, Amazon.com, and Priceline.com were profiting off the of the growing internet, and the world was witnessing this new economy take shape. However bad times were just around the corner. We didn't see huge amounts of unemployment, millions of dollars vanishing into thin air, bankruptcies, and SEC fines coming. At the end of 2000 the markets and its participants had been shelled shocked. For many though it was an eye opening experience, a lesson learned on when and when not to invest or speculate. Now in 2017, we're back to that same feeling that was in the air in early 2000, and it appears that the lessons learned in 2000 have been forgotten.
In the late 1990s dot-com hysteria engulfed almost everyone. The savy investor, the novice investor, the young and dumb, the old and wise. Everyone saw an opportunity to get rich or richer from a company with a dot-com at the end of its name. It didn't matter what the company did, if it had the dot-com behind its name investors wanted in. Common sense among the masses evaporated as dot-com company valuations continued rise. The dot-com company was the phenomenon of the time, and with most money making phenomenons every one wants in, whether or not they fully understand. Dot-com mania could only be contained by the investment community for so long and eventually left Wall Street and spilled over into Main Street. Your average Joe and Jane, people who had never invested before wanted in on the action, and started throwing piles of money into anything with a dot-com behind its name.
Many of these dot-com companies had never made a dime before going public. Even worse was that some of these dot-com CEO's couldn't tell you when the company would make a profit. And the CEO's, so many of these dot-com company CEOs were fresh out of college or should've still been in college. But with little to no training or experience these CEOs we're entrusted with millions of investment dollars. And many of them behaved like kids who just received a blank check. These dot-com company CEOs were adding fancy upgrades to their office spaces, hiring more people than they needed, and throwing parties. The parties... the parties were amazing. Dot com companies would have huge parties to celebrate certain milestones, like an amount of money raised or a number of website visitors. It's funny looking back because I don't remember any of the parties being based around sales or revenue. The parties were big and extravagant, but it was money wasted, money that should've been put back into their businesses. But Wall Street cared not to notice, and Main Street only saw new young millionaires. At the time dot-com employees we're receiving handsome stock option packages to compensate for what the company couldn't pay in salary. Secretaries, assistants, general office paper pushers we're millionaires because of their stock options during the height of the dot-com era.
The Market's Perfume.
But in front of all of these bad companies, with bad ideas, and inexperienced CEO's was the stock market. And the stock market was the perfume that hid the stink of these dot-com companies. The stock market was a rocket, and it pulled the stocks of the bad dot-com companies up with it. From July 1997 to March 2000 the S&P increased by over 125%. The three-year period prior to that the S&P increased by 51%. The market rise was driven by companies like Aol.com, Yahoo.com, Amazon.com, and Priceline.com, but other companies like Pets.com, eToys.com, Go.com, TheGlobe.com, and DrKoop.com to name a few benefited as well. And let's not forget Flooz.com, the company that was going to change how we paid for products online. (Have you heard that recently?)
The Smart Money
Now there was some smart money out there at the time. Wise investors that saw behind the curtain. At that time these investors felt that many of the dot-com companies didn't deserve the valuations they'd received from investors, and their reasons we're valid. As stated earlier many of these companies weren't making a profit, but few listened to the wise investors then. The wise investor was told they were old or antiquated, their methods of estimating value no longer applied to the market of the day.
The Fall Out
"Stocks that skyrocketed north in a fashion never seen before will plummet south in a fashion never seen before either," Steve Bengston, a managing director at PricewaterhouseCoopers in San Jose, Calif
After peaking in March 2000, the wheels started to fall off. The Nasdaq Composite lost 78% of its value over the next 30 months following its March 2000 high. The dot-coms had run out of funds and venture capital money had dried up. By the fall of 2000 companies started laying employees off by the bunches. According to the consulting firm Challenger Gray & Christmas Inc. there were 5,677 dot com layoffs in October of 2000, marking the fifth consecutive months of increasing dot-com layoffs.Then came liquidations, closings, then fines by the SEC to investment banks who had mislead investors. The country was left with a large number of unemployed people and millions of dollars seemed to have vanished into the air without a trace.
That excitement, the same exact one from the late 90s and early 2000 is in the air today. Cryptocurrency euphoria is here and the behavior by all parties involved is the same as it was 17 years ago. The popularity and rapid price increase of Bitcoin has turned people who had little interest in the markets into Jesse Livermore. New money or as Wall Street calls it dumb money continues to enter the cryptocurrency markets daily. New investors all looking to be the next cryptocurrency millionaire, with no experience, no guidance, and more importantly no plan are creating the liquidity needed for the smart money to leave the party. The Smart money, who invested in Bitcoin several years ago, enjoyed the ride and are now looking to retreat to the sidelines.
New money buys Bitcoin at $18,000, praying and hoping that someone out there is willing to pay $19,000 for it a day later. These new investors have not learned yet that "prayer" and "hope" are not investment strategies. And for some new investors that missed the Bitcoin train, they are betting over their heads on the other crytpocurrencies, hoping those cryptocurrencies mimic Bitcoins rise in price. Investors in the 90's did the same thing. Those who missed the boat on AOL, Amazon, and Priceline poured their money into companies of lesser value hoping they would mimic the success of an AOL, Amazon, or Priceline.
The Smart Money of Today.
Like the dot-com era, there are wise smart money investors and professionals counseling against reckless speculation in cryptocurrencies, but being told their ways of asset valuation don't apply to these markets, or that they are Bitcoin haters. I will admit that there are those out there who are very attached to the current banking system, and they view cryptocurrencies as a threat. But there are other investors and professional who have embraced the role Bitcoin and other cryptocurrencies will play in the financial system, but understand that mass market speculation doesn't end well; but even that person is considered a Bitcoin hater. 17 years later same arguments from the wise, same counter arguments from the euphoric. Where is George Santayana when you need him?
When The Wheels Fall Off.
When the cryptocurrency bubble pops it will be the greatest thing for cryptocurrencies moving forward like it was for dot-com companies in 2000. As dot-com after dot-com went out of business companies like AOL (later AOL Time Warner), Amazon, Priceline, and Yahoo we're still left standing. This will happen in the cryptocurrency market when the bubble pops.
According to coinmarketcap.com there are 1,375 cryptocurrencies. It feels as if there are more cryptocurrencies than places to spend these cryptocurrencies. Darwin's theory will play out in the cryptocurrency market and this will be a great thing in the long run, but it's going to hurt like hell in the short term. Millions of dollars will be lost (again) and only a handful of cryptocurrencies will come out on the other end.
When comparing today's cryptocurrency markets to the dot-com market of 2000 every thing is here. Great idea, check. Bitcoin and the idea behind it is a great idea. Alternatives to the original, check. Litecoin, Ethereum, and a host of others offer other places for investors to put their money aside from Bitcoin. Way to many alternatives trying to mimic the originals, check. 1,375 different cryptocurrencies! I still find that number hard to digest, but Bitcoin's price indicates that there is a demand for cryptocurrencies, so everyone wants in on the act. Euphoric atmosphere, check. When people you've known for years, who have never invested outside of their work 401K asks you about Bitcoin, we are in the mania phase of the market. Wise money speaking against the craze, check. No one wants to hear someone else tell them that the instrument that made others rich can't make them rich as well.
I don't want to give off the impression that I or the Seville Report are cryptocurrency bashers in anyway. We believe in Bitcoin and what it can do, but anything that invites a large number of speculators usually doesn't end well for the speculators. This has been proven in the Tulip Bubble and the Housing Bubble. It's all there, everything from 2000's dot-com hysteria. If I weren't writing this on an iPad I would swear it was 2000 all over again.
Some history: I worked as a stock broker from 1997 to early 2000. I was working in an office at the corner of Water St. and State St. in downtown Manhattan when the new millennium started. The small firm I worked for worked closely with Globix and Global Crossing. The firm and some of its clients made fortunes from investing in Globix and Global Crossing early, but many clients lost it all when they didn't take any profits off the table and Globix and Global Crossing went bankrupt. The firm, had so much investment money tied up in Globix and Global Crossing, that when those companies failed the firm came close to going out of business and was taken over by a company they once considered taking over. I left Wall Street in 2000 and watched the dot-com mess play out from home. Yesterday's millionaire became today's bartender. Not only did dot-com workers lose their job, but employees of companies heavily invested in dot-com companies lost their jobs also. I saw people take out second mortgages to get into the market, and others who attempted to "flip" their kids college money lose it all. But that feeling or mania that was in the air in 1999 to 2000, the feeling that made someone feel like taking out a second mortgage to invest was a good idea is in the air today, so be careful.