What is the Internet Bubble?
The Internet bubble was a speculative bubble that developed after the spread of the World Wide Web in 1991. Mania was part of a broader technology bubble that led to a large overinvestment in telecom and IT infrastructure. This investment rush led to the exponential growth and subsequent collapse of Nasdaq, the US technology stock market.
- The dot-com bubble was primarily the result of new, poorly understood commercial opportunities brought about by the spread of the World Wide Web.
- Many investors, including institutional investors, were uncertain about how to value a new company with a business model built on online activity.
- The final collapse of the Internet bubble was particularly influenced by the actions of the Federal Reserve and Alan Greenspan.
Understand the internet bubble
One of the hallmarks of the dot-com bubble in the 1990s was the suspension of investor distrust of the feasibility of many dot-com business models. In this new economy, companies only need to add “.com” to their name to see stock prices skyrocket after an initial public offering (IPO), even if they aren’t making a profit yet, with positive cash flow. Produce. Or even generate revenue.
Venture capitalists, investment banks and brokerage firms have been accused of hype about dot-com companies to ride the IPO wave, but the Federal Reserve’s monetary policy was the driving force behind the Internet bubble. Greenspan Fed aggressively lowered interest rates in the late 1980s and early 1990s, pushing a wave of liquidity into the capital markets and creating a technology boom.
Greenspan put, which developed during this period, was also criticized. From 1994 to 1995 Greenspan worked hard to bail out the Mexican peso, and in 1998 the Fed bailed out Long-Term Capital Management. This has led tech investors to expect the Fed to bail out if the dot-com bubble bursts, regardless of the underlying fundamentals.
Investors focus on growth, market share and network effectiveness, as traditional valuation methods were not considered applicable to new business models and Internet stocks with negative returns and cash flow. Many Internet companies have relied on aggressive accounting to increase their bottom line, as investors focus on metrics such as selling prices.
As capital markets invested in this sector, start-ups were competing for rapid growth. Companies without proprietary technology have abandoned their financial responsibilities and spent a lot of money on marketing to establish a brand that sets them apart from their competitors. Some start-ups spent 90% of their budget on advertising.
Internet bubble peak
Record amounts of capital began to flow into the Nasdaq in 1997. By 1999, 39% of all venture capital investment was directed to Internet companies, with nearly 295 of the 457 IPOs of the year related to Internet companies, followed by 91 in the first quarter. Only in 2000. The January 2000 AOL Time Warner Megamerger is considered the peak of this bubble, which will be the biggest merger failure in history. At the peak of the bubble, Greenspan said the internet bubble was sustainable and the tech sector, along with the Fed’s policies under his leadership, radically transformed the economy and permanently improved productivity. Famous for doubling his belief.
Internet bubble burst
Early in the bubble’s growth, Federal Reserve Board Chairman Alan Greenspan warned the market on December 5, 1996 of unreasonable enthusiasm. A Y2K bug to fund Internet stocks, the Fed has begun to moderately raise interest rates based on the inflationary imbalances built in the economy. After pouring petrol into the fire, Greenspan tried to dampen the flames of inflation, and in the face of slower financial expansion, the bubbles quickly burst.
The subsequent crash caused the Nasdaq Index, which had quintupled between 1995 and 2000, to fall from a peak of 5,048.62 on March 10, 2000 to 1,139.90 on October 4, 2002, down 76.81%. By the end of 2001, most dot-com stocks went bankrupt. Even the stock prices of high-end stocks such as Cisco, Intel and Oracle have lost more than 80% of their value. It will take 15 years for the Nasdaq to regain its dot-com peak. This took place on April 23, 2015.