Keywords: are the markets is a bubble like the dotcom bubble, what economic ear the present period resembles the most, similarities between bitcoin cryptocurrencies and the dotcom bubble, are markets is a bubble like 90s, is the bubble going to burst bitcoin cryptocurrencies.
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The study of historic events can empower us with an understanding that extends beyond our limitations. How events unfolded in the past can improve our understanding of past patterns, and how similar events may unfold in the future.
This report discusses the most prominent parallels between the 2000 recession or the dotcom bubble/dotcom crash, and the present period. The report relates the condition of the lats '90s and early 2000s, to draw comparisons. This time, it may not be different! As it never is. . .
The parallels are fairly obvious for those willing to see. This present era very much does resemble the dotcom bubble:
1. As in the dotcom bubble, an emerging tech (bitcoin and blockchain) has gone mainstream, the impact is similar to that of the emergence and prominence of the internet, especially enabled by Mosaic in 1993.
2. The Fed cut its discount rate by 91.6%, from 3% to 0.25%, to tackle the economic downturn caused by the covid crisis. This is similar to the 60% decline in the FED discount rate in the early '90s.
3. In the last few years, thousands of new ventures, which we are made to believe are 'currencies,' have been launched, just as the massive boom in the dotcoms in the '90s. Even though these 'currencies' do not possess the fundamental economic attributes required to be considered a currency. Yet, similar to the '90s, people aren't asking highly skeptical questions, with the assumption being fed, or consumed, that this is the future. We are on the bandwagon, just as we were in the '90s. Greed as an impulse, it seems, can supersede the instincts of rationality.
4. Just as the irrational state of the markets further moved into a form of manic frenzied state after 1995, arguably, we have seen persistent episodes of manic behavior in the current state of the markets, of both equities and 'cryptocurrencies,' with ventures that started as a joke, being worth more than $35 Billion, and certain shares, such as Tesla (TSLA) trading at prices which equate to a P/E ratio close to 1200 (April 2021).
The irrationality of the markets is at full display presently. The arguments, ironically, are very much the same, as they were in the '90s: Profits or returns may not be present for certain 'opportunities' in the market, currently, oh but these ventures are the future after all, and the profits will arise in the future. "Just as they did for pets.com, flooz.com, or boo.com, right? Oh, how we forget . . ."
5. With the invention of cryptocurrencies, its often argued that a new era has ushered in . . . As we were supposed to believe in the '90s with the dotcoms. While it may be argued that a new technological advance has been made with the invention of the blockchain technology, etcetera, it's also important to note that multiple revolutionary technologies have been invented or improved in the last decade, for example, neural networks or advances in fintech, yet we are made to believe that this one invention, the blockchain, trumps all others. . . Thus, money should be thrown at it in a manic frenzy?
Coming back to the dotcom bubble, as we now know that while some ventures did succeed long-term, the overwhelming majority failed. The money thrown at these ventures was unjustified, as is the case with the current condition with many 'opportunities' out there valued as if the world is reliant on them. Those that question the viability of these 'cryptocurrencies or hyper-valued companies, for example, usually, are given a generic concoction as a reply": oh, you don't understand what blockchain is," or, "You can't comprehend what this is going to do in the future." A first-year college student can impose this argument over a distinguished professor of computer science, yet, arguably, the majority would support the freshman.
The assertion imposing cryptocurrencies as the future, discounts all other emergent technologies, as if crypto is the only technological advancement that is leapfrogging everything else. Usually, there is also a dismissive attitude prevalent in the proponents, which is comparable to the condition in the '90s, just as proponents of the new dotcom companies were very dismissive of the skepticism or of questioning regarding the new companies and their long-term viability.
6. Due to excessive increases in the stock market in the mid to late '90s, many people left their day jobs to trade stocks. With the Nasdaq composite index increasing at a growth rate of 27% (geometric mean) YoY, making money, even without a fundamental understanding of finance or economics, was possible. Similarly, presently, we have seen a substantial increase in retail accounts and trading by individuals without the required prerequisite skills to trade securities, even though the stats on these accounts are out there. An overwhelming majority of retail trading accounts lose money, yet we have seen a substantial increase in these accounts.
The parallels are undeniable for those who are willing to see them. However, the abandonment of logical reasoning is a symptom of mania, and to those willing to see, the condition is quite obvious. These similarities, if they were written in a work of fiction, would surely have led the readers to question the verisimilitude of the work; yet, as events unfold in real life, they are largely ignored. The mentality is the same as before all economic calamities: "this is not that," and "this time it's different."
Another important issue worth understanding is that people, often misguided by fake clairvoyants or false Messiahs, start to take a form of devout conviction towards their views . . . Even though they cannot know the future of their highly speculative bets, they believe that it's going to be as they envision it . . . this can be classified as a form of faith. . . which history tells us, always leads to ruin. How many times have we heard: 'Bitcoin is the future, man, I just know it, haven't you heard the pros talk about it?"