Name: The Dot-Com Bubble - 5 Minute History Lesson
Uploaded: 2024-10-02T09:38:38.000Z
Duration: 6 min 58 s
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In the world of finance, we are often quick to forget the tragedies of the past.

Yet valuable lessons are to be had by exploring their causes and effects.

After all, in a world of ever-changing rules, products, and services, history is the one constant that can guide us through the ambiguity.

So let's take a 5-minute history lesson on today's plain bagel.

It's early 1993, and the internet is kind of poopy.

Sure, the ability to transfer data globally and developments like the World Wide Web have been revolutionary, but only 2.3% of the US population is actually online.

Because unless you're a techie, it's not that easy to use.

That is until the release of Mosaic, a user-friendly home internet browser that shows pictures alongside text.

Suddenly doing the internets isn't so hard.

Lean web traffic to increase 1000% within a month of Mosaic's release.

And as the web starts bumping, entrepreneurs make a move.

After all, with the internet in its infancy, there's a lot of untasked potential.

And with interest rates at their lowest points in the 70s, starting a company is easier than bringing cups to a potluck.

So before long, all kinds of dot-com companies start showing up.

From online retailers to search engines, early social media pages to...

But the real gold rush comes late 1995, all thanks to a company called Netscape Communications.

You see, Netscape has launched its own internet browser, known as Navigator.

And with its faster, easier-to-use interface, it's made quick work of Mosaic.

But anyway, even though Netscape is losing money to costs, the founders decide to cash in on the browser's success through an initial public offering.

Now, normally investors are looking for companies with solid profits to invest in.

And with internet adoption accelerating, you'd have to be a dummy to pass up on the opportunity.

So the stock goes public, and on its first day of trading, its price doubles.

With investor demand pushing the company's market capitalization to $2.7 billion in a matter of minutes.

Something that took General Dynamics 43 years.

It's a huge success, with Netscape reaching rockstar levels of fame, inspiring a wave of entrepreneurs and exciting investors.

And with the proverbial gates of Al-Hala now open, we enter the internet age.

As people flock to achieve their own online glory.

Before you know it, auction sites, web portals, internet radio, and even a food delivery service are coming online.

With new companies revolutionizing life as we know it, and experiencing huge sales growth right out the gate.

Not to mention investors are tossing money at every IPO they can.

Now, sure, companies are swinging out their Yahoo for this growth.

So after costs, their profits are pretty, well, non-existent.

But hey, this is the internet we're talking about.

If you want to make it big, you've got to be spending to grow your business.

And besides, with the banking industry convincing investors that losses now just mean larger profits down the road, there's plenty of money keeping the dream alive.

So dot-coms continue to splurge, spending investor funds on advertising, acquisitions, fancy offices, fat paychecks, and all-expenses-paid vacations and parties for employees.

By 1999, the tech-heavy Nasdaq has doubled, with even telecom and equipment companies getting in on the action.

Building out infrastructure and enabling companies to explore the boundless frontiers of the internet.

But before long, troubling tides begin to emerge.

With sales growth becoming the only thing investors care about, companies are employing growth-at-all-cost tactics.

Selling units at a loss, spending excessively on marketing, and making hasty acquisitions to keep up their growth.

Worse yet, some companies are simply adding dot-com to their name to get in on the hype, with others going public without even having a finished product.

But investors have been convinced to look past outdated metrics like profitability and valuation.

So they're buying up anything with a pulse and a domain.

Something that only intensifies when rumors surface of an impending computer calamity, Y2K.

A calendar bug that threatens to end technology as we know it.

The scare leads to a wave of computer equipment upgrades, boosting business activity and pushing markets into an outright mania.

Stocks start seeing 400, 500, nearly 700% returns on their first day of trading.

With other takers rising above 1,000% in 1999 alone.

People are leaving their day jobs to trade stocks full-time.

And as more companies battle for online real estate, things start to feel like a fever dream.

Whoopi Goldberg is advertising in Crypto Wannabe.

And an online retailer has spent millions to make a stock puppet a nationally recognized mascot after mere months of existence.

And on March 10th, 2000, the Nasdaq Composite Index hits 5,048 points.

A bubble 200 times the size of underlying earnings.

But while it would take the index only five years to rise over 500%, it would take only half that to undo it all.

You see, with the Federal Reserve planning on aggressively tightening monetary policy and insiders cashing out, selling pressure has been on the rise.

Not to mention that, after crazy spending, people just don't need as much computer equipment or online retailers.

So on March 13th, when it's announced that Japan has entered a recession, the Nasdaq slips.

Suffering its fourth largest loss up to that point.

It's enough to spook investors and get them questioning whether their companies can survive without their chief capital.

As the taps turn off, dot-coms find themselves burning through cash.

And with promised profits failing to materialize, things go from Mamma Mia to Red Wedding real quick.

Within months, companies that had reached $100 million valuations become worthless.

And markets tumble as management mishaps and even fraud come to light.

By March of 2001, the U.S. is in a recession.

And on October 9th, 2002, the Nasdaq bottoms out.

At 1,114 points, a 77.9% decline from its peak.

Over 415,000 IT jobs would be lost as a result of the tech crash.

And it would take the Nasdaq 15 years to recover.

While some dot-coms would survive and actually go on to prosper, half would fail by 2004.

With many others becoming but shadows of their former selves.

Oh, and as for Netscape, the company that arguably kicked this all off?

It would lose its market share to a program released just a week after its IPO, Internet Explorer.

And while AOL would acquire the company, its name, and that of thousands more, would eventually fade into obscurity.

It goes to show that not all that glitters is gold.

And while a great idea can send stock prices to unfathomable levels, it takes but a reality check to pop a bubble.

Despite the dot-com crash, the internet, and by extension the web, did of course go on to revolutionize the world.

Just not in the way many investors had hoped for.

In fact, while the number of websites online grew during the bubble, it continued rising after the crash.