What was the dot-com bubble and what happened when it burst?
In: Economics
Anything with .com at the end of it was getting funding it seemed like. Many .coms were bought and sold without ever showing a profit or a chance at profitability.
Mark Cuban made Billions off of [Broadcast.com](https://Broadcast.com) which would broadcast college sports games and presidential election news, etc over the web. Yahoo bought it and shut it down within just 2-3 years I think.
Back then people were making money from early implementations of online shopping and services. People started seeing web commerce as a licence to print money and were keen to jump onto the bandwagon. Like other “bubbles” it developed a momentum of it’s own and lack of critical analysis led to investments that didn’t stack up against likely returns. It’s never really burst and is still happening to a certain extent, there are many internet-based companies whose profits are well below the return on investment ratios that would be expected from a bricks-and-mortar company.
The internet was a fun,new, and shiny type of toy. So when people made these new toys, everyone went crazy for them and was willing to spend lots and lots of money. Even simple little toys were very expensive.
Then one day, when all the toys were incredibly expensive, some people pointed out “hey are these actually as good and fun* as people think?”.
The toys were not as good and fun* as people thought, and the people who had paid lots and lots of money for the toys then found that their toys weren’t worth anything anymore.
*”Fun” in eli5 terms being money returned on initial investment in not eli5 terms.
The dot-com bubble was the product of investor speculation throughout the late 90s as a result of the rise of the internet. Investors effectively overhyped the rise of the internet by investing in a bunch of unproven companies that were thought to have lots of potential in the coming years. So, stock prices skyrocketed due to high demand and high expectations. As a product of this feedback loop, the Nasdaq experienced a 400% rise from 1995-2000. Everything was super overvalued. Eventually, people realized that their hype train had led to overvaluation of small startups in the spring of 2000. So, the stock market collapsed, taking down plenty of these new companies with it.
Companies with lots of debt suddenly found that investors were no longer willing to support them for some elusive possible profit years down the road while the companies grew market share. As a result a few major tech companies that were making profits (or not making large losses) were able to grab huge chunks of the market for virtually nothing.
In the late 1990’s as the Internet expanded from a niche service to the worldwide juggernaut that it is today, a lot of investors were trying to get rich by investing in web businesses. From 1995 to 2000, the NASDAQ (an index that tracks parts of the American stock market) rose by 400%. It went from under 1000 to nearly 5000 in that span – and when it popped, it was barely over 1000 in the fall of 2002. Basically the crash wiped out all of the gains that had come during the run-up.
It was the classic economic definition of a bubble. Speculation led to a ramp-up in prices that weren’t supported by underlying fundamentals, and eventually people saw the writing on the wall and started panic selling.
The Dot-com bubble was a massive speculative bubble centred around the then new technology of the internet, tons of companies popped up to develop new technologies/products for it or old ones were claiming they would be revolutionized by it. The hype was so high that anyone with a half-baked idea and little idea of how it would actually turn a profit was showered in investment capital.
Its exactly like Uber today, it only exists as a company not because its making a profit but because the investors throwing money at it believe that someday it will.
Eventually though investors came down from the ‘internet is magic’ hype as they came to realize it was rather mundane, it could not revolutionize the pet food delivery industry and online ads were actually worth near nothing [(not near enough to pay people to look at them, which was an actual dot-com business model)](https://www.youtube.com/watch?v=RuzoIG9py_c). All these unprofitable companies were not only going to remain unprofitable but actively hemorrhaging money, so the bubble burst.
Investors lost money, lots of silicon valley people and surrounding business’ lost their jobs, it kicked off a minor economic recession and some tech CEO’s made out like bandits. And everyone learned to never invest on speculative assets you haven’t done research on ever again… until 8yrs later with the 2008 financial crisis.
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