What Would a Dotcom-Style Crash Look Like in the Cryptocurrency Space?

I’m writing these words in an airport hotel in Hartford, CT, hoping some heavy snow won’t prevent me from flying to Miami this afternoon to join thousands of cryptocurrency and blockchain enthusiasts and entrepreneurs at The North American Bitcoin Conference. Meanwhile, the price of Bitcoin is on a significant downturn, and the number of blockchain-based startups holding ICOs is ballooning. Many people have called this all a bubble waiting to burst, and the resemblance to dotcom mania in the late 90s is undeniable. But when people call Bitcoin and the crypto space a “bubble,” their implication usually is that it doesn’t matter and will go away soon. I don’t think that’s an accurate characterization. To see why, let’s take a look at what the crypto/blockchain landscape would look like if it suffered an event of about the same magnitude of the dotcom crash.

First, investor value would be lost. Before the dotcom crash, a widely used list of 280 stocks peaked at around $3 trillion in market capitalization, and during the crash lost over $1.7 trillion of that value. As I write this article, the estimated market cap of Bitcoin and the many altcoins introduced to the market stands just below $500 billion (I’ve see it above $700 billion on better days for crypto prices). So the amount of investor money at stake is considerably less than it was during the dotcom crash, but not out of the realm of comparison. A crash of the magnitude we’re discussing would cost investors at least  few hundred billion dollars. Would that be enough to spill over into the wider economy and cause an overall downturn? It’s hard to say.

What about this plethora of blockchain-based startups? The narrative of the dotcom crash is that most of these companies had nothing real behind them and went away. The data tell a somewhat different story. David Kirsch, a business professor at the University of Maryland, has found that almost half (48 percent) of dotcom companies had either survived several years after the crash or had been sold. A dotcom-style crash would constitute a major shakeout in the crypto space, but it would also leave a large number of presumably the stronger companies reeling but intact.

Comparing an asset or currency like Bitcoin to stocks is fraught with pitfalls, but it may be instructive to see how the largest and most widely known internet companies did before, during and after the crash. Amazon had an IPO price of $18, climbed over $100, and dropped below $10 during the crash. Today it trades at over a thousand dollars per share. Similar stories can be told about companies like eBay and Facebook. Even if the most well-known cryptocurrencies endured seemingly catastrophic drops in price, it does not mean they would cease to be relevant or recover value with time.

I’ve previously written about how the dotcom bubble aided in the evolution of the industry surrounding the internet. A dotcom-style crash in the burgeoning blockchain industry would probably mean less of a party in Miami now. But I’d love to be a fly on the wall of that same party in ten or twenty years.

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Max Gulker, PhD

Max Gulker joined AIER in 2015. His primary research areas are applied microeconomics and industrial organization. Max previously worked as an economist for Keystone Strategy, supporting expert testimony for antitrust and intellectual property litigation in high tech industries. Prior to that, he worked on financial litigation matters with NERA Economic Consulting. Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Follow @maxgAIER.