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During the dot-com boom of the late 1990s, the stock market was such that both retail and institutional investors were competing to buy up shares in nearly every Internet startup they could get their hands on. The general consensus was that the Internet was “the future” and that we were only months away from these online startups trampling traditional industries and putting them all out of business.
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The dotcom bubble is a reflection of today’s crypto market. Hype, FOMO, and inflated valuations divorced from fundamentals created an inevitable correction when returns no longer matched prices. Virtual currencies are beginning to be valued. As tokens mature and generate tangible returns, many are now betting 100x or more on returns, exposing overvaluation similar to the dot-com bust. Integration determines the next step. Weak projects will fail, but fundamentally sound protocols can survive recessions and lay the foundation for a durable Web3 era, just as Amazon and Google emerged from the dot-com bust.
The hype was real, and as investors set their sights on massive 100x to 200x returns, the dreaded “fear of missing out” took hold, losing any sense of logic in the process. As long as a company had “dotcom” somewhere in its name, it was destined for greatness. Or so they thought.
But with millions of dollars locked down, companies like Pets.com, Webvan, Kozmo.com, and eToys.com had to build their businesses. Customers started signing up, profits started trickling in, and then things started to get messy. The problem was that while there was some return, it wasn’t as much as promised, and it quickly became clear to investors that they had paid 100 or 200 times earnings for their stock. That was bad news.
Historically, the average price/earnings ratio for companies in the S&P 500 index has hovered around 15 to 25 times, which is considered healthy. So if an investor is paying 100x or 200x, that means the stock they own is significantly overvalued. Once that started to materialize, investors tried to sell, the market crashed, and the dot-com boom turned into a bust.
It took years for the stock market to recover, but it wasn’t a complete disaster. The companies that survived the dot-com era didn’t just survive, they ended up becoming monsters, with companies like Amazon.com and Google now among the most valuable companies on the planet, with market capitalizations in the trillions of dollars.
Is virtual currency also a bubble?
Today, many investors and analysts liken what happened during the dot-com era to today’s artificial intelligence market, which is currently on the crest of a similar wave of enthusiasm. However, few realize that the dot-com bubble more accurately reflects today’s crypto market.
Cryptocurrencies enjoyed unprecedented gains earlier this year when Donald Trump entered the White House for a second term with a pledge to make the United States the “crypto capital” of the world. With the bull market in full swing, the price of Bitcoin (BTC) has soared, hitting multiple all-time highs, while assets like Ethereum (ETH) and Solana (SOL) have seen similar gains. The familiar feeling of “FOMO” took hold once again, and altcoins went into overdrive.
That was until a few months ago, when cryptocurrencies suddenly hit a wall. The mood started to deteriorate as Bitcoin struggled to grow beyond its newly established ATH of around $126,000 in October. Prices started falling slowly at first, but then fell even faster, with Bitcoin losing nearly a third of its value after just two months. That decline had a knock-on effect on altcoins, with many coins taking an even bigger hit, with some low-cap coins losing more than 50% of their value in the past two months.
There is much debate as to the causes of this sharp decline, with many experts pointing to economic uncertainty and concerns about an AI bubble, but also the maturation of the crypto market.
In the early days of the dot-com bubble, it was difficult to assess the value of the most prominent startups of the time, and the same was true for cryptocurrencies. However, as the market matures, many tokens are starting to establish viable use cases and revenue streams. ETH, for example, generates revenue for holders through staking rewards and DeFi activities such as re-staking and lending. Thanks to blockchain fees and transparency of daily user activity, these revenues are predictable.
As we saw in the dot-com era, once a project starts generating a steady revenue stream, anyone can perform some rough analysis to figure out a rough price-to-earnings ratio for that token. Early investors in startups like Pets.com were stunned to discover they had overpaid for the stock they owned, and many crypto investors have made similar shocking discoveries.
Although it is difficult to establish an accurate P/E ratio due to the non-traditional nature of crypto returns, many tokens appear overvalued due to the promise of high future utility and rewards as opposed to current earnings potential. Looking at the staking returns for some tokens, there is a strong case to be made that many investors paid well over 100 times their potential return, much like the hardcore investors caught up in the madness of the dot-com bubble in the early 2000s.
The dawn of the Web3 era
While it is difficult to know the exact drivers of the ups and downs in the crypto market, the current downturn has many similarities to what happened during the dot-com era. However, if this analogy is true, it means that we can somewhat predict what will happen next.
When the dot-com bubble burst, the least profitable startups quickly folded, leaving unlucky investors with huge losses. However, not all dot-com companies have disappeared. In fact, companies with sound business models don’t just survive. They dominated the market and quickly began to prosper. Amazon, Google, and others laid the foundation for Web2, which ultimately led to the rise of social media, cloud computing, smartphone applications, streaming, and online business.
The cryptocurrency industry is currently at a similar crossroads. The prospect of an actual bear market is increasing by the day, and further declines are likely to wipe out tokens that lack any real utility or purpose. Looking ahead to 2026, cryptocurrencies look set to be a year of consolidation. There will be a lot of pain as the most dubious projects fold, but the strong will not only survive, but perhaps even lay the foundation for the long-awaited Web3 era. A world where individuals take back control and opportunities abound for all of us.
