Is the Dot-Com Bubble happening again?
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The Dot-Com bubble, also known as the "internet bubble," was a period of rapid stock growth and speculation in the late 1990s and early 2000s, driven by the emergence of the internet, an innovation poised to disrupt the world economy. Amid companies with great products, other companies just rode on the Dot-Com wave. Investors eventually poured money into many of these companies that weren't even sure of their ideas, driving up valuations to absurdly high levels. These led to a frenzy of initial public offerings (IPOs) and acquisitions as investors scrambled to get a piece of the market.
However, many of these companies had no sustainable business models or unique-selling products, and their valuations were based on hype and speculation. After some triggers in the early 2000s, the bubble burst, leading to a sharp decline in the stock prices of many Internet companies. Other companies went bankrupt as investments dried up. Another reason was the lack of a solid Minimum Viable Product (MVP) to keep revenue flowing.
How did this happen?
The year is 1991. Tim Berners-Lee just put some code together to invent the World Wide Web, a global information system that made it possible to access documents and other web resources over the internet, giving people broader access to more information than ever before.
Fast forward to 1995, and the world is moving fast to catch up with this growing technology. The internet would become the future, with many businesses exploring new ways to use this technology to create great products.
In addition to these favorable conditions, the American Federal Reserve had just lowered interest rates, making government bonds less attractive to investors. The Taxpayer Relief Act of 1997 also reduced tax payments on capital gains. These conditions were what retail investors, hedge fund managers, money managers, and others needed to start the massive buy-up of internet company stocks, make acquisitions, and take part in IPOs. On the surface, this was a great business decision, as the internet had proven to be the driver of the 21st century's economic expansion.
However, the fear of missing out (FOMO) led many to invest in companies without carrying out proper due diligence or confirming the viability of their products. As more investments poured in, stock valuations continued rising until they burst in 2000.
What triggered the burst?
The Dot-Com burst was likely triggered by increased interest rates.
Within 1999 and 2000, the American Federal Reserve raised interest rates several times, peaking at 6% in March 2000 and 6.5% in April 2000. These encouraged investors to move their money away from more volatile assets like stocks and put it into more stable government financial instruments like bonds.
Many started selling their stocks to buy government bonds. The selling pressure, coupled with the news of a recession in Japan, led to more people selling off their internet stock as they feared a contagion. Eventually, the increased selling pressure caused more selling pressure, which burst the internet stock bubble, sending prices crashing and sending the Nasdaq Stock Exchange to new record lows.
Will the Artificial Intelligence boom fuel the next "Dot-Com" burst?
The new AI rush is fueling the next stocks and investment frenzy. Microsoft, Google, and a host of other companies have invested billions of dollars in early investments to take a cut of the market. Retail investors are not left out either. They have bought up large chunks of AI stocks, sending valuations skyrocketing.
Investors are purchasing stocks with the hope that artificial intelligence (AI) similar to Microsoft's ChatGPT will revolutionize the world, reduce expenses, and create new paths for economic growth.
However, as FOMO (fear of missing out) increases and the rally reaches new heights, there are concerns that gains may soon become unsustainable.
For instance, the share price of Chinese chipmaker Cambricon Technology Corp. has tripled, making its market valuation exceed $10 billion, even though the company has been reporting losses since 2017. Beijing Haitian Ruisheng Science Technology, another Chinese company, had its shares quadruple, even though it often warns investors about the limited growth of artificial intelligence-generated content (AIGC).
Will the AI frenzy eventually lead to another tech bubble?
Maybe not. Time will tell.
Article was curated by Akeju Abiola F.