The headlines read “major index down 80 percent”. Another goes “systemic fraud… CEO in hot water”. Yet another talks about “multiple individual issues down 90 plus percent with certain bankruptcy”. Emphatic media echoing the realities of a complete market meltdown. The headlines I am referring to were from 2000/2001 referencing the tech bubble bursting and the Worldcom accounting fraud. Eerily similar to the headlines of today regarding crypto melting down and the fraud and failure of FTX. And that is EXACTLY the point. Every major bubble, when it bursts, looks and feels the same. Sadly, its obvious to all after the fact. The parallels between the 2022 Crypto debacle and the 2000 tech wreck are striking. People losing lots of money (usually through dumb investments but that’s another point), fingers pointing at “the bad guys”, Congressional investigations, and people going to jail. Yes…. The parallels are obvious…
In the late 1990’s, and marketed as “the new life changing thing”, the internet was in its infancy. It had existed for a few years, but the vast improvement in data storage, data integration, and communications enhancements gave it speed and ease of use. It was the new era, life changing, and coupled with low interest rates (sound familiar), created speculation. Speculation that encompassed EVERYTHING. Renaming a company to “dotcom” made the stock triple or more. Renaming K-tel (an old and dying record seller) K-tel.com jumped the stock from 6 to 70 dollars a share simply because it would start to sell old records “on line”. A new concept. It summarily tanked and was delisted, but that was the obvious conclusion to a bubble bursting a few years later. The world wide web as it was called was the gold rush of the new millennium. Those of us with long memories were dumbfounded at the length and voracity of the bubble. Not to say the web wasn’t life changing (it was) but the 10,000 stock issues that showed up were just too much. Valuations got loopy and when your crazy uncle starts crowing about his tech stocks, you know its soon to be midnight. The Fed, seeing the same, raised interest rates and the party was soon over. In spectacular fashion. Nasdaq down 80 percent and a total wipe out of speculative stuff. Yahoo, Wordcom, CMGI, Pets.com, AOL, ICG….. all lost their entire stockholder equity. The survivors, Amazon, Cisco, Oracle, Intel, lost a whole lot but did ultimately survive. Barely...
Crypto currency began quietly in 2009 with the first….Bitcoin. Existing as a fringe concept and an oddity, it took 8 years for the price to exceed the 1000 dollar mark. By 2022 there were 10,000 different crypto currencies. You read that right…. Ten thousand !!!! A fourfold increase in number of tokens from 2020 which corresponds with the “free money” Fed policy we have bashed in earlier rantings. Yes Virginia…. low interest rates and cheap money invariably leads to speculation. Always has… The tonic of no cost capital coupled with an aggressive desire to gamble, lead us from the sublime to the ridiculous. Crap that had no business in being was touted by celebrities as “fortune favors the brave”. As we heard from our kids, nieces, nephews about their crypto prowess it was hard not to question our beliefs. Like hearing our neighbors dot com winners in 2000 we got a large dose of crypto bragging. Now, like then, the masses are silent as to their losses and licking their wounds. Classic case of a bursting bubble.
In keeping with the spirit of Thanksgiving…..the good news. The crypto debacle is noteworthy. Lots of money vaporized. People took huge hits. But, and it’s the big one…. at its peak, the total value of all crypto was a tad under 3 trillion dollars. Comparing this to the total global stock market (100 trillion) or the global bond market (400 trillion), it’s comparatively very small. And that’s the gift. A small asset class that got dismembered but not big enough to cause a contagion to the rest of the capital markets. Yes, people got eviscerated and many lost their life savings, but it won’t tank the system. Vastly different than 2000. Vastly different than 08 when bad mortgages were massive and deeply embedded in the financial system.
Good history lesson but what’s the point? Glad you asked…..The point is that bubbles happen. They are a function of the human animal, its need to gamble, and the cheap (at the time) cost of money. We have seen 3 of em in the past 20 years. The key is to NOT get caught up in them, not to lose perspective, and not to chase rainbows. A solid strategy of planning-based investing to meet a financial goal is the answer. Its ok to put a few bucks on the “crypto wheel” or “dot com” table but it’s not ok to allocate excessive amounts of capital in the quest. Like with the tech bubble, most crypto will disappear. A few will survive and thrive in the next 20 years. If you can guess the winners, you are better than me.
As always, thanks for listening and thanks for the trust you put in us every day. It’s a responsibility we take to heart and strive to fulfill every day. Have a wonderful Thanksgiving and don’t hesitate to reach out for anything you may need.
This article is intended strictly for educational purposes only and is not a recommendation for or against cryptocurrency.