What was the dotcom bubble?
Also referred to as the Internet bubble, the dotcom bubble was a historic period of excessive speculation on the rise of US technology stocks valuation, driven by investments in internet-based companies in the late 1990s.
During the internet bubble, the value of stock markets raised exponentially. Technology-dominated NASDAQ index surged five-fold, from 1,000 to over 5,000 from the year 1995 to 2000. Within the following years, 2001-2002, the dotcom bubble burst, U-turning stocks into a bearish market.
The NASDAQ composite stock market index, which includes numerous Internet-driven companies, climbed its record high of 5,048.62 on 10 March 2000, before crashing to 1,139.90 on 4 October 2002, constituting a 76.81% fall.
By the end of 2001, the majority of dotcom stocks had exploded. Even blue-chip stocks of big technology companies, including Oracle, Qualcomm, Intel and Cisco lost over 80% of their value.
Only 15 years later – 23 April 2015 – the NASDAQ index managed to reach its dotcom peak.
Where have you heard about the dotcom bubble?
It all began with an inevitable shift towards the Information Age, where the economy is based on information technology. With the development of Internet technology, between 1990 and 1997, the number of computer owners among general public raised from 15% to 35% as having a computer at home shifted from a luxury to an absolute necessity. On the wave of technological revolution, many new companies were born.
At the same time, the Taxpayer Relief Act of 1997 decreased the tax on capital gains and get people more interested in making more speculative investments. The success of several technology companies during the IPOs, including Yahoo!, Excite and Lycos also generated a strong willingness to invest in internet companies.
What you need to know about the dotcom bubble.
A combination of rapidly growing stock prices and confidence in future profits created an environment, in which many investors were overlooking traditional indicators, including price-earnings ratio, and relied mostly on technological advancements, which eventually led to the internet bubble.
The market was flooded by an unprecedented amount of personal investments and stories of people, quitting their jobs and become full-time day traders.
At the peak of the bubble, a dot-com companies easily went public and raised a significant amount of money, even if they never made a profit. Some startups spent around ninety percent of their budget exclusively on advertising.
People, receiving employee stock option became real paper millionaires, when their companies executed IPO. However, lock-up periods restricted many shareholders to sell their shares immediately. The most successful ones managed to sell them and enter into hedges.
Finally, the bubble burst spectacularly. Many investors faced enormous losses and many internet-related companies went bankrupt, evaporating trillions of dollars of invested capital. The most notorious survivors include eBay, Amazon and Priceline.