A New Dot Com Bubble?

In May 1997, Amazon [NASDAQ:AMZN] listed on the stock exchange.

It went public at a price of US$18 per share. This valued the company at US$438 million.

$3,000 invested then would now be worth $3,834,000 20 years later.

This shows the power of investing in a game changing technology at the right time.

When Amazon listed, the internet had been in the public consciousness for a while — since the early nineties.

Ex-Vice President Al Gore was talking about the ‘information superhighway’ as early as 1991.

But then in 1998, Amazon’s shares went up over 900% in just 12 months.

This then acted as the trigger point for the dot com boom of 1999.

The public had awakened to the potential of the internet.

A stock market bubble ensued.

Investors made fortunes. Then many lost them in the eventual crash.

But this is old news.

So why am I telling you about it today?

It’s like this…

I see a lot of parallels with cryptocurrency environment and the dot com boom of the 90s.

Both involve technological revolutions.

And like the internet has changed your life, cryptocurrencies and blockchain technology will do the same.

Bitcoin’s recent price surge has awakened the wider public to the investing opportunity. Just like Amazon did for internet stocks.

Most folk are beginning to ask themselves how they can benefit, from an investing point of view.

How can you ensure you invest in the eventual ‘Amazons’ of the crypto world — and not the ‘Pets.com’?

The first thing to do is to realise what stage we are at in the cycle.

Despite many calling bitcoin and cryptocurrencies a bubble, I don’t think that’s the case yet.

Usually Wall Street is ahead of the game on new investment themes. So, when the general public do eventually get involved, there’s a last resurgence before the crash.

The ‘smart’ money usually cashes out, leaving the ‘dumb’ money holding the can.

With cryptocurrencies though, this is not what is happening. If anything, Wall Street is late to the crypto party.

That might explain their constant attempts to talk it down.

But that is changing…

In 2018 you will see a slew of regulated bitcoin products come online. From exchanges, managed funds to bitcoin futures.

This will change everything. And create the conditions for a tsunami of cash to come into the crypto market.

For the first time, big institutions like pension funds will invest.

We’re talking institutions that manage hundreds of billions of dollars. And it’s not just going to go into bitcoin… 

Beyond bitcoin

Like the dot com boom, all sorts of innovative cryptocurrencies have sprung up, or are about to.

Each will sound exciting.

Each will lure investors in the promise of being the next big thing.

But most will eventually fail.

Here’s the thing, though. This doesn’t mean you can’t make money. On the failures, as well as the successes….

Early dot com boom investors made money all through 1999. The problem is most handed it back in the eventual crash.

That’s a lesson for crypto investors now. You have to have a plan. And be prepared to do the work.

There are cryptocurrencies out there today with huge potential. As the wave of institutional money rolls in, in 2018, a lot of these altcoins will rise strongly. There’s even a chance one of them may replace bitcoin as the most valuable cryptocurrency.

There’s no question there are unbelievable opportunities out there right now. But you need to know why you’re investing. You need to understand the technology that each cryptocurrency is developing. As well as who its competitors are.

You need to understand who the people behind each crypto are, how it was launched, and how big the market potential is.

You need to understand the crypto-economics of each token. That is, how do you as a token holder make money from holding a cryptocurrency?

You need to keep abreast of the entire market, be careful in the security and storage of your investments, and work out how to handle crypto forks.

Lastly, you need to understand market dynamics. How to gauge buy in points, how to manage your risks, how to spot signs that a crypto is in terminal decline, how to spot pump and dump schemes, scam coins and dodgy operators.

There’s a lot to this. It’s a potential minefield.

It’s not easy money. You have to make some effort if you want to succeed.

Lessons from the dot com era

Those that smugly declare cryptocurrencies will end up in a new dot com crash miss the point.

But there are certainly lessons you can glean from the dot com era.

This isn’t simply about an eventual crash. After all a crash could happen when bitcoin hits $100,000 or more.

And when you are investing in speculative areas there is always a crash coming! So even the broken clock is always eventually right.

Despite that, this is about once in a life time investing opportunities. Not just in bitcoin, but also in a whole host of other game changing technologies.

Changes that will alter the way you live as much as the internet has.

For investors, gains as big as Amazon’s over the next 10 or 20 years really are on the table. This is not a fad that will simply fade away.

It’s not often you have opportunities like this.

But as I said before, it’s not easy to pick the winners. Analysts said Amazon was going to fail plenty of times during its rise. And some still say so today!

You have to be willing to do the hard yards. And invest with a plan.

And if cryptocurrencies are not for you, and you want to sit on the sidelines, that’s fine too. In fact, you can invest in the technological trend without touching a cryptocurrency, if you want to. You can read more about how here.

But if you’re waiting to see what happens with cryptocurrencies first before you invest, remember this. Make sure you aren’t the one that jumps on late, after Wall Street has got its fill. After prices have risen even further to undreamed of levels.

When that happens, we’re more likely at that point to be in a true bubble.

Good Investing,

Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia