By Hrishikesh Menon. Edited by Arjun Chandrasekar.
Overview
The dot-com bubble of 2000 was a financial crisis led by the crash of internet company stocks. It was a bubble created by pure speculation of venture capitalists and investors in internet companies.
Pre-bubble
During 1998-2000, the period before the bubble burst, internet companies were on the rise. Many famous blue chip companies today such as Amazon, Oracle, Dell, Cisco had gone public around late 80s-early 90s. Investors were beginning to see the potential in the internet business and wanted to profit off of it. This kicked off a major speculative frenzy where venture capitalists and investors were pumping in hefty amounts of money into virtually any dot-com company without any regard towards the companies’ fundamentals and financial health. Many of these dot-com companies were very financially unsustainable as they had only IPO’d quite recently (they had not even begun to make profits) and were terrible at controlling costs as many companies had poured almost all their budget into marketing and advertising. The Fed(Federal Reserve) chairman at the time, Alan Greenspan, had warned the markets of such speculative trading yet he did not take the necessary measures to control the bubble growth at the appropriate time. Banks and brokerages had extensive liquidity which facilitated the speculative investments into dotcom companies.
Bubble Burst
There were several reasons why the bubble burst. The Nasdaq 100 index (consisting of most technology related stocks) had surged from approximately 1184 points to 4810 points in less than 2 years. Once the index had peaked at around 5000 points, major tech companies such as Dell and Cisco had started to sell off huge amounts of their own shares which kicked off a major sell off in the tech sector. Many of the dotcom companies which had reached market caps worth hundreds of millions had turned worthless by the end of FY2000. Another reason for the bubble burst was the drying up of capital investments. The Fed, although very late in doing so, tightened monetary policies on capital investments by regulating liquidity of bank and brokerage assets. This cut many investors from acquiring the funds required to continue pumping internet companies which killed the demand for such stocks.
The Aftermath
Within a year, investors had lost upto $5 trillion due to reckless investments in unstable internet companies. The Nasdaq 100 index took 15 years to erase the whooping 75% loss. The tech sector has had a meteoric rise ever since with the Nasdaq 100 rising approximately 200% in just 5 years as new technological innovation continues to evolve and companies continue to create additional revenue streams to optimize profits. Although there are many more safety measures in place for any future bubbles, the exponential growth in the tech sector today has some investors concerned but many others remain bullish.
