What Is the Internet Bubble?

The Internet bubble was a speculative bubble that developed following the popularization of the World Wide Web in 1991. The mania was part of a broader 澳洲幸运5官方开奖结果体彩网:tech bubble that led to massive over-investment in telecoms and IT infrastructure. This investment rush 𓆏led to exponential growth and a subsequent collapse in the Nasdaq, the market for U.S. technology 🐽stocks.

Understanding the Internet Bubble

One of the features of the Internet bubble of the 1990s was investors’ suspension of disbelief about the viability of many dot-com business models. In this 澳洲幸运5官方开奖结果体彩网:New Economy, a company needed only to have a “.com” in its name to see its stock prices skyrocket following an 澳洲幸运5官方开奖结果体彩网:initial public offering (IPO), even if it had yet to make a profit, produce any positive cash flow, or even produce any revenue.

Venture capitalists, investment banks, and brokerage houses were accused of hyping dot-com shares so they could cash in on the wave of IPOs, but Federal Reserve monetary policy was the underlying driver for the Internet bubble. The Greenspan Fed aggressively lowered interest rates through the early 1990s pushing a wave of liquidity into capital markets that initiated the boom in tech.

The 澳洲幸运5官方开奖结果体彩网:Greenspan-put that developed during this era was also to blame: in 1994-1995 Greenspan lobbied hard for the Mexican peso bailout, and in 1998 the Fed bailed out Long Term Capital Management. This led tech investors to expect that regardless of underlying fundamentals, the Fed would in turn bail them out too if the Internet bubble were to burst.

Because it was believed that traditional valuation methods could not be applied to Internet stocks with new business models and negative earnings and cash flow, investors put a premium on growth, market share, and 澳洲幸运5官方开奖结果体彩网:network effects. With investors focusing on valuation metrics like price-to-sales, many Internet firms resorted to 澳洲幸运5官方开奖结果体彩网:aggressive accounting to inflate revenue.

With capital markets throwing money at the sector, start-ups were in a race to get big fast. Companies without any proprietary technology abandoned fiscal responsibility and spent a fortune on marketing to establish brands that would differentiate themselves from the competition.

The Peak of the Internet Bubble

Record amounts of capital started flowing into the Nasdaq in 1997. By 1999, 39% of all venture capital investments were going to Internet companies. A reported 289 of the 457 IPOs that year were related to Internet companies, followed by 86 in the first quarter of 2000 alone.

The 澳洲幸运5官方开奖结果体彩网:AOL Time Warner 澳洲幸运5官方开奖结果体彩网:megamerger in Jan. 2000, is regarded as the peak of this bubble, which would become the biggest merger failure in history. At the very peak of the bubble, Greenspan famously doubled down on his belief that the Internet bubble was sustainable and that the tech sector, along with Fed policy under his leadership, had fundamentally transformed the economy to permanently increase productivity.

The Internet Bubble Bursts

Early in the growth of the bubble, Fed Chair Alan Greenspan warned the markets about their 澳洲幸运5官方开奖结果体彩网:irrational exuberance on Dec. 5, 1996. Finally, by the spring of 2000, after banks and brokerages had used the excess liquidity the Fed created in advance of the Y2K bug to fund Internet stocks, the Fed had begun to mildly raise rates based on inflationary imbalances building in the economy.

Having poured gasoline on the fire, Greenspan now tried to da🍒mpen the inflationary flames, and in the face of slower monetary expansion, the bubble immediately burst.

The crash that followed saw the Nasdaq index, which had risen fivefold between 1995 and 2000, tumble from a peak of 5,048.62 on March 10, 2000, to 1,139.90 on Oct. 4, 2002, a 76.81% fall.

By the end of 2001, most dot-com stocks had gone bust. Even the share prices of blue-chip technology stocks lost more than 80% of their value. It would take 15 years for the Nasdaq to regain its dot-com peak, which it did on April 23, 2015.

The Bottom Line

With the advent of the Internet, individuals raced to take advantage of the new technology. Companies sprang up quickly in order to benefit from the World Wide Web, setting foot in the telecom and IT space. Investors who didn't want to miss out on the boom threw cash at these companies without truly understanding their fundamentals, creating an Internet bubble.

Over time, it quickly became apparent that many of these new tech companies were hollow, not really offering substantial products nor developing ways to make a profit, and the Internet bubble 澳洲幸运5官方开奖结果体彩网:crashed as investors pulled out.