Is Cryptocurrency a Bubble? Cryptocurrency and the Dotcom Bubble

Is Cryptocurrency a Bubble?

Cryptocurrency is a recent phenomenon that started around ten years ago. After Bitcoin was invented, several altcoins appeared on the scene including Namecoin and Litecoin. These altcoins promised improvements such as faster payments and scalability, and sometimes alternative use cases such as decentralizing existing internet services. But what are altcoins? And is cryptocurrency in a bubble? In this article I dive into the cryptocurrency landscape and compare it to the early internet and Dotcom Bubble.

Table of Contents

The Dotcom Bubble Explained

The Internet was invented in 1980 by two computer scientists named Vinton Cherf and Bob Kahn. A decade later Tim Berners-Lee developed the World Wide Web which was intended as a way to share information between scientists and universities using the internet.

At first, nobody understood how big the Internet would become. Economist Paul Krugman predicted the internet would have no more impact than the fax machine. Many people thought the internet was a fad and wouldn’t gain mass adoption.

Early internet similarities to cryptocurrencies
A photo taken at the peak of the Dotcom Bubble by simiant

This narrative changed throughout the 90s as the internet matured as a technology. Netscape, which developed web browsers, was the first internet company to go public. After Netscape’s IPO in 1995, many other internet companies went public.

Investors at the time didn’t know what impact the internet would have on the world, but many speculated it was going to be huge. The internet was the next big thing and any company that was associated with this new technology looked like a great investment.

Companies like,, and went public in the late 90s or early 2000s, raised large sums of money from investors but went bankrupt shortly after.

Early Internet Investors Didn’t Pay Attention to Fundamentals

The NASDAQ index rose 400% between 1995 and its peak in March 2000. But investors didn’t pay attention to the fundamentals of the internet companies that went public during this time. Many of the businesses that went bankrupt didn’t have sound business models in the first place. for example, a pet food and supply company, was undercharging for shipping to attract customers, which made it difficult to make money. Another internet company,, was a popular site for holiday shopping but wasn’t profitable.

After its peak in March 2000, the NASDAQ started selling off and subsequently lost 78% of its value in the following three years. Most early internet companies went bankrupt and closed their doors. Only a few internet companies such as Amazon and eBay survived.

Dotcom bubble similarities to Cryptocurrency bubble
Chart of NASDAQ during Dotcom Bubble between 1994-2005

In retrospect, Amazon is the most notable winner compared to other early internet companies. Although Amazon’s stock price plunged from $107 to $7 per share, investors that held on to their shares until today would have experienced a 45,000% gain.

Even if investors bought in during the peak of the Dotcom Bubble, when Amazon was trading at $107, their shares would now be worth $3,158 each. An investment of $10,000 during the peak of the bubble would be worth over $300,000 today.

The Bubble Triangle and How It Contributed to the Dotcom Bubble

Alan Greenspan was chair of the Federal Reserve during the time of the Dotcom Bubble. Greenspan repeatedly downplayed the rampant speculation that was going on in technology stocks during the 90s.

Not only that, but he lowered the Federal Funds Rate in the late 90s although the economy was growing at 5-6% per year.

The cut of the Federal Funds Rate coincides with the massive blow-off top of the Dotcom Bubble. When Greenspan cut interest rates, the economy was flooded with “cheap money” which ended up in technology stocks. This cheap money combined with the mania surrounding the internet as a novel technology led to the Dotcom Bubble.

According to William Quinn and John Turner, there are three factors that contribute to the formation of bubbles:

This is known as the “Bubble Triangle”.

All sides of the triangle were present during the Dotcom Bubble: Greenspan’s cut of the Federal Funds Rate in the late 90s provided the market with cheap credit and easy money. Technology company shares were easy to acquire and marketable. And many investors bought stocks for pure speculation while ignoring fundamentals such as business models and cash flows of the companies they were investing in.

But what about cryptocurrency? Is cryptocurrency in a bubble? Are the same underlying dynamics at play that were present during the Dotcom bubble?

Let’s take a closer look at the cryptocurrency market.

Is Cryptocurrency a Bubble Similar to the Dotcom Bubble?

Bitcoin was invented in 2008 by a pseudonymous inventor called Satoshi Nakamoto. Three years later, the first altcoin called Namecoin appeared. Its protocol was almost indistinguishable from Bitcoin but was meant for an alternative use case: To improve internet security and privacy.

Shortly after Namecoin was launched, another altcoin called Litecoin was released. This cryptocurrency marketed itself as a “lite version of Bitcoin” that would be more suitable as money.

In 2013, the development team behind Mastercoin did the first Initial Coin Offering (ICO). Initial Coin Offerings are similar to Initial Public Offerings of a company stock. Instead of taking a company public and allowing investors to buy a share of the company, during an Initial Coin Offering tokens are sold to investors before the project goes live. This is a way for development teams, companies and foundations to raise money and fund their projects.

Ethereum did its ICO in 2014 and raised $18,300,000 in order to crowdfund itself. One year later, on the 30th of July 2015, Ethereum went live.

The Cryptocurrency Bubble and the Rise of ICOs

The emergence of ICOs since 2013 has a lot of resemblance with IPOs in the 90s. During the Dotcom Bubble, many internet companies rushed to go public and attempted to raise money even though they had weak fundamentals, unproven business models and weren’t generating any cash flow.

Investors jumped on the opportunity to participate in these IPOs because any company that had “internet” or “dot com” in its name seemed like a great investment regardless of fundamentals.

The same speculation can be observed with ICOs since 2013. After Bitcoin’s spectacular rise from a few dollars to over $1,000 between 2012 and 2013, altcoins started to appear on the scene. Other cryptocurrencies that promised improvements and marketed themselves as better versions of Bitcoin popped up consistently since bitcoin’s 2013 bull run.

Litecoin and the cryptocurrency bubble
Image of Litecoin Summit in 2019 by Candlelight1975

During Bitcoin’s next bull run in 2017, ICOs where happening everywhere. While they were relatively scarce in 2013, everyone wanted a piece of the “crypto” pie and lots of entrepreneurs launched their own altcoins.

Many of them have disappeared or became irrelevant today. Others turned out to be outright scams or rug pulls. All of them have failed to outperform bitcoin’s price increase over the last decade or surpass bitcoin’s market cap despite having attracted large investment sums and being marketed as better versions of bitcoin.

Similarities Between the Cryptocurrency Bubble and the Dotcom Bubble

Regardless of fundamentals, anything with the word crypto or cryptocurrency on it seems to attract a great deal of speculation.

The ingredients of Quinn’s Bubble Triangle appear to be present as well in the current crypto boom. In response to the Global Financial Crisis of 2008, which in itself was the result of loose monetary policy, Ben Bernanke cut the Federal Funds Rate to zero percent and kept it there for almost a decade.

During Greenspan’s time as chair of the Federal Reserve, the Federal Funds Rate was still relatively high despite the cut. Greenspan’s cheap money became “free money” under Bernanke. The economy and financial markets were flooded with money which prevented a deflationary depression. This money had to go somewhere and it ended up in the cryptocurrency market.

Cryptocurrencies are highly divisible and liquid and trade 24/7 on exchanges. Investors can buy a fraction of a token, which makes cryptocurrencies more marketable than technology stocks.

The final ingredient of the Bubble Triangle, speculation, is more present in the cryptocurrency market than it was during the Dotcom Bubble. In the 90s, investors believed that the internet companies they bought would eventually have certain fundamentals in place such as profitable business models and future cash flow.

In the case of meme coins like Dogecoin and Shiba Inu there are no fundamentals. These coins are used for pure speculation and only bought with the expectation that the price will go up in the future.

All three sides of the Bubble Triangle are more present today than they were during the Dotcom Bubble. The cryptocurrency market is more marketable, benefited from over a decade of zero percent interest rates and has attracted levels of speculation not even seen during the peak of the Dotcom Bubble.

The Unsustainable High Number of Cryptocurrencies

The cryptocurrency market has already experienced one smaller bubble in 2017 that was followed by a 90% crash the following year. While many altcoins that were launched since 2013 disappeared, were exposed as scams or became irrelevant, those with more promising fundamentals like Ethereum have been sticking around.

At the same time, many new altcoins like Cardano and Solana popped up. Today, there are over 14,000 altcoins. In comparison, the NASDAQ exchange has listed around 3,300 companies.

It is hard to believe that all these 14,000 altcoins will be around in 5, 10 or 20 years from now. It seems more likely that most of these altcoins will eventually go to zero and disappear. In comparison, almost all early internet companies went bankrupt and closed their doors once the Dotcom Bubble burst. Only Amazon, eBay and a few others survived and became household names that are still relevant today.

I don’t believe the cryptocurrency market will follow the same dynamic that the Dotcom Bubble did. The Dotcom Bubble took place during a period of around 5 years. The cryptocurrency market has been in a bubble for longer than this.

When Will the Cryptocurrency Bubble Burst?

I believe the cryptocurrency market will go through a series of booms and busts from which many altcoins won’t recover. Rather than expecting a gigantic crash that wipes out all altcoins in a matter of months, there will be several 50%-90% crashes from which Bitcoin and a few other altcoins will bounce back, while most other altcoins will have a hard time retaining their price and will trend towards zero over time.

This has already been happening to many of the early altcoins. Analyst Willy Woo plotted 118 cryptocurrencies on a chart and compared their historic performance with that of Bitcoin.

Is cryptocurrency a bubble?
Historic performance of altcoins compared to Bitcoin by Willy Woo

As you can see, almost all of them are trending towards zero. While this chart was made in 2016, a similar trend should be noticeable over the long-term in the next 5-20 years.

In other words, the cryptocurrency bubble won’t burst all at once. It will go through a series of smaller boom and bust cycles that slowly but gradually wipe out most altcoins. This could continue for several more years or even decades.

Is cryptocurrency in a bubble? I believe it is. But it won’t play out the same way that the Dotcom Bubble did. While there are some similarities, the cryptocurrency market is unique.

The Confusion About Private Money and Technology

There is a fundamental difference between the Dotcom Bubble and the cryptocurrency bubble. The Dotcom Bubble took place in the realm of technology.

The cryptocurrency bubble is taking place in the realm of private money.

This is an important distinction and one that causes a lot of confusion among investors. As the terms suggests, cryptocurrencies shouldn’t be treated as technology in a broad sense but as monetary technology.

Developers, companies and organizations that launch their own cryptocurrencies are issuing their own forms of private money. Cryptocurrencies are competing on the basis of monetary properties. As private monies, they are competing for the crown of “best money”.

Most investors are treating cryptocurrencies as if they were technologies instead of money. Similar to the Dotcom Bubble, little attention is paid to fundamentals.

Monetary Properties of Cryptocurrencies and the Search for the Next Bitcoin

Since cryptocurrencies are private monies, we need to look at the fundamentals of money to asses whether a particular cryptocurrency is strong or weak.

Historically, the fundamentals of money can be boiled down to:

  1. Durability
  2. Divisibility
  3. Verifiability
  4. Fungibility
  5. Portability
  6. Scarcity

These are the core monetary properties that private monies are competing for.

Cryptocurrency investors are constantly looking for the next Bitcoin. They think of Bitcoin as the “MySpace” or the “” of the cryptocurrency industry. For them, it appears to be outdated technology that will be replaced by a newer and better technology.

But since cryptocurrencies are private monies, we must compare them based on their monetary properties and not how advanced their protocols are or what other “bells and whistles” they come with.

While it could be argued that some cryptocurrencies are more divisible and fungible than Bitcoin, none of them are as durable, verifiable and scarce. For a detailed comparison of the monetary properties of Bitcoin and altcoins, read my article called Bitcoin Maximalism: Toxic Culture or Noble Cause.

In the article I explain why Bitcoin is fundamentally different from altcoins. If you’re unsure why something like Bitcoin, gold or cryptocurrency can have any value at all, check out my other article called the Intrinsic Value Fallacy.

Winner-Take-All Tendency Among Competing Monies

If we look at cryptocurrencies as private monies and not as technologies, the market will eventually choose the private money with the superior monetary properties.

There is a simple reason for this: Anyone who stores their wealth in a cryptocurrency with inferior monetary properties will lose money or subject their wealth to significantly more risk than necessary.

While cattle, salt, seashells and large stones were used as money in certain cultures throughout history, storing wealth in any of these monies became irrational as soon as a commodity with superior monetary properties like gold became available.

Stone money used by the Yap
An example of stone money used among the Yap islands

Gold is more durable, divisible, verifiable, fungible and scarce than all of the other mentioned monies. Why store your wealth in seashells, salt or cattle if gold serves as a better store of value, medium of exchange and unit of account? It doesn’t make sense. That’s why gold became the preferred money throughout most of human history. Anyone who chose an inferior store of value got punished and eventually switched to gold.

We shouldn’t expect this to be different in the digital world. We are currently in a race for the best digital money. Those who store their wealth in cryptocurrencies that have inferior monetary properties will get punished in the long-run.

Just like there was one unifying money in the pre-internet age, it’s likely that there will be one unifying money in the digital world. The winner won’t emerge from a battle of technology but from a battle of monetary properties.

The digital money with the superior monetary properties will eventually win.

While gold, silver and a hand-full of altcoins might still exist next to Bitcoin, they will likely fade in comparison. The majority of today’s 14,000 altcoins will probably disappear.

Is Cryptocurrency in a Bubble?

Looking at the fundamentals of Bitcoin and alternative cryptocurrencies through the lens of monetary properties, I believe the cryptocurrency market as a whole is in a bubble.

When investors analyze stocks or real estate properties, they look at fundamentals like cash flow to determine if something is a good investment. Investors that buy growth stocks and invest in technology companies look at the future growth potential of a company. Even though a technology company might not produce any cash flow yet, its potential to generate future cash flow can make it a great investment.

This type of fundamental analysis cannot be applied to cryptocurrencies. They aren’t companies, real estate properties or regular technologies. As the name implies, they are monetary technologies, or in other words, private monies.

Monetary goods derive their value from a unique set of criteria. These monetary properties are what make something suitable and attractive as a store of value, medium of exchange and unit of account.

Given that Bitcoin has a market cap of less than $1 trillion and gold has a market cap of over $10 trillion, I believe Bitcoin is trading below its “fair value” price. If we define a bubble as an asset that is trading significantly above its “intrinsic value”, Bitcoin doesn’t meet the definition of a bubble.

On the other hand, if monies tend to have a winner-take-all tendency and the money with the superior monetary properties eventually earns the “crown” and gets widely adopted, I would expect that most altcoins will eventually have no value at all.

This is why I believe the cryptocurrency market as a whole is in a bubble.

February 11, 2022