internet bubble

What is the Internet Bubble?

The dot-com bubble was a rapid rise in U.S. technology stock valuations fueled by investments in Internet-based companies during the bull market of the late 1990s. During this period, the value of the stock market has grown exponentially, with the tech-led Nasdaq rising from less than 1,000 to more than 5,000 between 1995 and 2000. Things started to change in 2000, when the stock market bubble burst into a bear market between 2001 and 2002.

In the ensuing crash, the Nasdaq fell 76.81% from a peak of 5,048.62 on March 10, 2000, to 1,139.90 on October 4, 2002, after the index rose fivefold between 1995 and 2000. By the end of 2001, the stocks of most Internet companies were bankrupt. Even blue-chip tech stocks like Cisco, Intel, and Oracle fell more than 80%. It took 15 years for the Nasdaq to reach its peak again on April 24, 2015.

key takeaways

  • The dot-com bubble was a rapid rise in U.S. technology stock valuations fueled by investments in Internet-based companies in the late 1990s.
  • During the dot-com bubble, the value of the stock market increased exponentially, with the Nasdaq rising from less than 1,000 to more than 5,000 between 1995 and 2000.
  • After the bubble burst in 2001, the stock market entered a bear market.
  • The Nasdaq rose fivefold between 1995 and 2000 and fell nearly 77%, leading to billions of dollars in losses.
  • The bubble also caused several internet companies to go bankrupt.

Understanding the Internet Bubble

The dot-com bubble, also known as the dot-com bubble, was created by a combination of speculative or fad-based investments, a flood of venture capital funding for start-ups, and the failure of dot-com companies to turn a profit. Investors poured money into Internet startups in the 1990s in the hope that they would one day be profitable. Many investors and venture capitalists have backed away from prudence for fear of not being able to profit from the Internet’s growing popularity.

Startups are racing to grow rapidly as capital markets pour a lot of money into the industry. A company without any proprietary technology waives its financial responsibility. They spend a fortune on marketing to build their brand and set them apart from the competition. Some startups spend up to 90% of their budget on advertising.

Speculative bubbles are notoriously difficult to identify when they occur, but seem obvious after they burst.

A record amount of capital has flowed into Nasdaq since 1997. By 1999, 39% of venture capital went to Internet companies. That year, the majority of the 457 initial public offerings (IPOs) involved Internet companies, with 91 in the first quarter of 2000 alone. AOL Time Warner’s mega merger in January 2000 was the largest merger failure in history.

The bubble eventually burst, many investors faced huge losses, and several Internet companies went bankrupt. Notable companies that survived the bubble include Amazon, eBay, and Priceline.

The dot-com bubble is just one of several asset bubbles that have popped up over the past few centuries.

How the Internet Bubble Burst

The 1990s were a period of rapid technological development in many fields. But it was the commercialization of the internet that led to the largest capital growth expansion the country has ever seen. While high-tech flag-bearers like Intel, Cisco and Oracle have driven organic growth in the tech sector, it was the nascent internet companies that drove the stock market surge that began in 1995.

The bubble that formed over the next five years was fueled by cheap money, easy capital, market overconfidence and pure speculation. Venture capitalists, eager to find their next big investment, invest in any company with “.com” after its name for free. Valuations are based on earnings and profits, and if the business model does work, it won’t be there for a few years, and investors are all too willing to ignore traditional fundamentals.

Companies that have yet to generate revenue, profits and, in some cases, finished products, have tripled and quadrupled their shares in one day when they go public, sending investors into a frenzy.

The Nasdaq peaked on March 10, 2000, at 5,048, nearly double what it was last year. Several leading tech companies, including Dell and Cisco, placed huge sell orders on their shares when the market peaked, sparking panic selling among investors. Within a few weeks, the stock market was down 10%.

As investment capital begins to dry up, so does the lifeblood of cash-strapped internet companies. Internet companies with market caps in the hundreds of millions become worthless in a matter of months. By the end of 2001, most publicly traded Internet companies had collapsed and trillions of dollars of investment capital had evaporated.

Internet Bubble FAQ

How long did the Internet bubble last?

The Internet bubble lasted about two years from 1998 to 2000. The period from 1995 to 1997 is considered to be the pre-bubble period when the industry started to heat up.

Why did the Internet bubble burst?

The dot-com bubble burst when capital began to dry up. In the years before the bubble, record-low interest rates, internet adoption, and interest in tech companies allowed capital to flow freely, especially to startups without a track record of success. Valuations rose and funds eventually dried up. This caused many companies that didn’t even have a business plan or product to go out of business, causing the market to crash.

What caused the internet to crash?

The dot-com bust was triggered by the rise and fall of tech stocks. The growth of the internet caused a stir among investors, who quickly poured money into startups. These companies were able to raise enough money to go public without a business plan, product or track record of profits. These companies quickly ran out of cash, which caused them to go out of business.

What caused the stock market crash of 2000?

The stock market crash of 2000 was a direct result of the dot-com bubble burst. It pops up when most tech startups that raise money and go public fail when funding dries up.

Did Amazon survive the dot-com bubble?

Amazon was one of the companies that survived the dot-com bubble, as were other major companies like eBay and Priceline.

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