Economic bubbles aren’t new. From the tulip bubble of the 1630s, to the dot-com boom of the late 1990s, to the big-tech mania we’re seeing today, overvaluations happen — but not all bubbles pose the same risks or offer the same rewards. Every few years, it seems we’re warned of another looming “bubble” about to burst. Most recently, pundits like Warren Buffett and George Soros have compared the rise of cryptocurrency to the dot-com bubble, wondering aloud if we’re on the precipice of a big bust.
The similarities are fairly obvious. Cryptocurrency startups, much like the dot-coms, are experiencing an influx of capital that’s boosting the valuations of solid, innovative companies along with their relatively worthless counterparts — Dogecoin comes to mind as a cautionary tale. But while the dot-com boom produced plenty of duds, let’s not forget that it also gave birth to Amazon, Google, and eBay. Similarly, there are resilient, well-managed cryptocurrency companies that will be able to withstand drastic market fluctuations.
Sure, the current state of cryptocurrency bears some resemblance to the ’90s tech boom, but there are important differences to consider. Understanding the following factors can help you to mitigate long-term damage as the market naturally begins to self-correct.
1. Say hello to regulation: Cryptocurrencies, unlike the early dot-coms, are shaking up the U.S. monetary system and offering an alternative to worldwide fiat currency. Early internet technology was groundbreaking, but decentralized currency is truly revolutionary. Most governments don’t quite understand what’s going on, much less how to deal with it.
Recent fluctuations in the price of bitcoin and other cryptocurrencies were the direct result of new regulations announced by the South Korean government, and other regulatory agencies across the world are guaranteed to make similar moves. They will eventually make examples of nefarious players, helping to weed out more “shadowy” companies from the industry.
Be ready to work with government agencies and adapt to new regulations when they inevitably arrive. Private companies that behave like public companies are more likely to come out on top. In that same vein, be sure you’re not taking a ton of money from unaccredited investors — or investing it in secretive ways. The industry may not yet be fully regulated, but you need to start running your company as if it were.
2. Just say no…to casual investing: Yes, some venture capitalists in the dot-com era would throw money at any startup that showed signs of life, but the risks seem greater for those entering the crypto space with insufficient knowledge. More than 1,000 cryptocurrencies are active right now, and quite a few are hoping to ride the wave without doing their homework first.
Perceived bubbles are funny: They can propel even the worst companies to the top of the stock charts. You need to understand how to capitalize on the bubble — raising as much capital as you can (without destroying the structure of your company) and then managing that cash (knowing it won’t always be there).
Be able to effectively communicate your long-term value to shareholders. The blockchain is a brilliant invention, with applications we’re just beginning to discover, ranging from the financial space to healthcare, cybersecurity, retail, and beyond. It will transform the world as we know it, making a handful of companies and their investors extremely wealthy in the process. To find investors who will stay with you for the long haul, showcase realistic, revenue-generating applications of this technology and prove it can outlive the hype.
3. Abandon geographical boundaries: While the dot-com bust had some ripple effects on the world economy, the rise and fall of Silicon Valley was far more localized. Cryptocurrency is traded across the world, and countries are taking vastly different approaches in their adoption and regulation of it. South Korea only recently started exploring regulation, for instance, while Sweden has been offering derivatives in Bitcoin since 2015.
The international scope of this marketplace presents both unique challenges and an array of opportunities. Vitalik Buterin, founder of Ethereum, argues that blockchain offers particular value in parts of the world where people can’t yet trust their institutions — places such as Africa, India, and Eastern Europe. Blockchain, he argues, resolves the issue of market manipulation from the top-down.
All that’s to say: You must invest in a capable management team that can see the big picture. Nobody will predict every little twist and turn in the market, but the better your understanding of how your company could succeed on an international scale, the higher your chances of success.
When looking for dynamic and adaptable management teams, focus on candidates with a track record of success — those who can navigate an ever-changing technology landscape while incorporating traditional financial market tactics. At Neptune Dash we did just that, incorporating a well-versed technology team with adept financial leaders with proven success on public markets.
Finding footing on shaky ground
The ’90s tech boom was followed by a solid bust. In November 2000, an index of 280 internet stocks was down by $1.7 trillion from its 52-week high. Contrast that with recent fluctuations in digital coins, and the difference is obvious. Its value may rise and fall, but anyone who bought Bitcoin a year ago has earned more than a sixfold return on investment, for example.
The highs may be higher and the lows may be lower than in other industries, but the underlying technology is here to stay. Despite the common misconception, not all bubbles are created equal. An overvalued startup that does nothing for the world is destined to crash, but just as the Googles of past eras have survived, so will the very best cryptocurrency companies.