Reflections of the Dot-Com Age

During the dot-com surge of the late 1990s, the stock market became a chaotic landscape where both retail and institutional investors rushed to acquire shares of virtually any internet startup they could find. It was widely believed that the internet represented “the future,” with these fledgling online companies poised to outpace traditional industries and render them obsolete.

The excitement was palpable, and the dreaded “fear of missing out” gripped investors as they eyed massive 100x-200x returns, disregarding logic in the process. Few considered the fundamentals—if a company contained “dot-com” in its name, it was deemed destined for success. Or so they believed.

However, once these companies secured millions in funding, firms like Pets.com, Webvan, Kozmo.com, and eToys.com faced the challenge of building a sustainable business. Customers began to sign up and revenues trickled in, but things started to unravel. The revenue generated was far less than anticipated, and it quickly became evident that investors had paid as much as 100x or 200x earnings for their shares. This was problematic.

Historically, the average price-to-earnings ratio for companies in the S&P 500 hovers around 15-25 times earnings, which is regarded as healthy. Therefore, when investors pay 100x or 200x, it signals that their shares are grossly overvalued. When this realization hit, investors strove to sell, triggering a market crash that transformed the dot-com boom into a bust.

It took years for the stock market to recover, but it was not a total calamity. The dot-com era survivors didn’t just endure—they flourished, with giants like Amazon and Google becoming some of the most valuable companies on the planet, achieving multitrillion-dollar market caps.

Is crypto in a bubble too?

Today, many investors and analysts draw parallels between the dot-com era and the current enthusiasm around artificial intelligence. However, fewer have noted that the dot-com bubble more accurately reflects the situation in the cryptocurrency market today.

At the start of the year, as Donald Trump entered his second term with promises to elevate the U.S. to the status of the world’s “crypto capital,” the cryptocurrency market experienced unprecedented gains. The bull market was thriving, with Bitcoin (BTC) reaching multiple new all-time highs, while assets like Ethereum (ETH) and Solana (SOL) saw similar surges. Altcoins surged in response to the familiar wave of “FOMO.”

That was until a couple of months ago when cryptocurrency suddenly hit a wall. Bitcoin found it difficult to rise beyond its new peak of approximately $126,000 in October, and the sentiment began to shift. Prices started to drop slowly at first, then significantly quicker, resulting in Bitcoin losing nearly a third of its value in just two months. This decline rippled through altcoins, some of which suffered even more, with low-cap coins losing over 50% of their value.

Discussions abound regarding the reasons behind this dip, with many experts citing economic uncertainty and AI bubble concerns. However, the maturation of the crypto market has also played a role.

In the early days of the dot-com bubble, assessing the value of the leading startups was challenging, just as it has been for cryptocurrencies. However, as the market matured, many tokens established viable use cases and revenue streams. For instance, ETH generates revenue for holders through staking rewards and DeFi activities such as restaking and lending. These revenues have become more predictable, thanks to the transparent nature of blockchain fees and daily user engagement.

Much like in the dot-com era, once a project begins to produce a stable revenue stream, anyone can perform a basic analysis to estimate a rough price-to-earnings ratio for that token. Early investors in startups like Pets.com were shocked to realize they had vastly overpaid for their shares, and many crypto investors are now facing similar disillusionment.

Although establishing an exact P/E ratio for cryptocurrencies is complicated due to their non-traditional earnings, many tokens appear overvalued based on their promises of high future utility and rewards, juxtaposed against their current earnings potential. Examining the staking revenue of various tokens suggests that many investors may have easily paid over 100x their earnings potential, akin to the eager investors caught up in the euphoric madness of the dot-com bubble in early 2000.

The dawn of the web3 era

Understanding the exact factors influencing the crypto market’s fluctuations is complex, but the current downturn shows striking similarities to the dot-com controversy. If this analogy holds true, predictions about future developments can be made.

When the dot-com bubble burst, many unprofitable startups quickly vanished, leading to substantial losses for unfortunate investors. However, not all dot-com companies disappeared. In fact, those with sound business models survived and thrived, seizing control of the market. Giants like Amazon and Google laid the groundwork for web2, which ultimately produced social media, cloud computing, smartphone applications, streaming services, and online commerce.

The cryptocurrency sector now finds itself at a similar crossroads. The potential for a genuine bear market is increasing daily, and further declines could eliminate tokens lacking real utility or purpose. As we approach 2026, we seem poised for a year of consolidation in the crypto arena. While pain looms as questionable projects fail, the resilient will not only survive but may also lay the groundwork for the long-awaited web3 era, where individuals reclaim control and opportunities await everyone.

Stephen Wundke

Stephen Wundke is the strategy and revenue director at Algoz Technologies. He joined Algoz in late 2022 and pioneered the unique SMA structure for an off-exchange settlement product called Quant Pro, utilizing Zodia Custody and Bitfinex.