The dot-com bubble: how it was. The dot-com crisis - description, history and interesting facts Will startups and social networks cause a disaster?

Ten years ago, on March 10, 2000, the collapse of the IT sector began, which has remained in history as the "dot-com crisis". On this day, the US market index, specializing in stocks of high-tech companies, NASDAQ reached its all-time high of 5132.52 points, doubling the indicators of a year ago, and in just two months the rise was 1000 points. After that, a sharp drop began. In just five days, the index returned to the value of 4580 points and the decline continued. A year later, the values ​​of this index fluctuated around the level of 1500, and by the end of 2002, they generally approached the bottom - 1100. Now this mark is hovering at about 2500 points.

The "IT bubble" began to form in the late 90s as a result of the surge in Internet companies' shares. The desire to grab a piece of the investment pie pushed businessmen to form more and more new Internet companies and reorient old companies to Internet business. The word "Internet" magically inflated stock prices, capitalization of network giants like! or AOL, broke all records - for example, the market value of the subsequently bankrupt Nortel Networks exceeded $ 180 billion at that time. Analysts were confident that NASDAQ would “break” the 6,000-point bar and actively advised investing in growing high-tech companies.

"If you are a shrewd trader, then your portfolio should contain high-tech stocks that symbolize the new economy," - stated at the beginning of an article released by analysts of the investment fund Prudential Securities a couple of days before the collapse began.

In reality, these new business models proved to be ineffective, with large loans spent mainly on advertising and attracting new investors. This led to a massive drop in the NASDAQ index, as well as prices for server computers. Most IT companies have gone bankrupt, liquidated, or sold. As of the end of November 2001, the prices of shares of Sun Microsystems, BEA Systems fell by more than 62, 70 and 78%, respectively, compared with the figure before the crash. Several company executives have been convicted of fraud and embezzlement of shareholders' money.

However, Tim Leister of the University of Virginia and Brent Goldfarb of the University of Maryland, in their research on the dot-com boom, counted the number of companies that successfully survived the crisis, and concluded that there were fewer casualties than is commonly believed. "People usually imagine that the 2001 crisis killed 90% of dot-coms, but in fact, out of a random sample of companies that received venture capital investments in 1999, about half were still in business five years later," they say.

Ten years later, analysts believe that

The "dot-com crisis" became "one of the rehearsals" for the global financial crisis.

“The nature of all crises, in principle, is the same - the overestimation of a certain asset,” says Denis, head of the analytical department at Grandis Capital. But if the dot-com crisis brought down only the high-tech sector and almost did not touch the fundamental foundations of the world economy, then the mortgage crisis affected one of the pillars of the modern economy - financial system which made it worldwide.

It is impossible to exclude the recurrence of such “bubbles” in the future, concludes a senior analyst at the Olma Investment Fund.

“No conclusions have been drawn, as history shows, and there is no guarantee that they will not be repeated,”

- agrees Barabanov. And no restrictions will help here, the analyst believes.

It is difficult to predict where the next bubble will burst. Perhaps it will be dot-coms again. Danger analysts are looking for social networks such as Facebook, MySpace, Twitter, Vkontakte. Due to their huge audience, they are very attractive to investors, for example, according to the analytical website comScore, in October 2009 the audience of Facebook exceeded 430 million users worldwide, MySpace - 120 million, and Twitter - more than 50 million. As in the situation with dotcoms, the owners do not yet understand how to make money on social networks. So far, large Internet projects are operating at a loss. So, according to comScore, the cost of maintaining YouTube in 2009 amounted to $ 740 million, and this is twice as much as the portal managed to earn during this period. Hope rests on growing advertising revenues. So, if in 2007, according to the estimates of the analytical company eMarketer, the advertising market for social networks reached $ 1.225 billion, according to forecasts, by 2011 the volume of this market should grow to $ 3.8 billion.

V modern conditions the new "dot-com crisis" will be more dangerous than the previous one. "Deep specialization modern business leads to dependence on a variety of suppliers and consumers. Problems for one of the companies in this chain can destroy the entire business, ”says Alexey Steputenkov, Development Director of the Hosting Community group of companies.

At the turn of the nineties and two thousand, due to speculation and unjustified optimism, investors lost about $ 5 trillion. The exchange was brought down by the rise of unprofitable Internet startups. Could something like this happen today?

2001 saw one of the biggest stock collapses in recent history - the NASDAQ tech index collapsed. Along with the fall of the index, it burst. A huge number of internet startups have gone bankrupt. Even those companies whose business was established suffered huge losses.

Why is this story interesting and why, almost 20 years later, analysts find similarities with that crisis in our time?

First steps on the Internet

In the first half of the nineties, a period of active development of the Internet began. An increasing number of users began to have personal computers, and companies began to massively switch their activities to work on the Internet. If the company did not have its own website, it seemed undignified.

At the same time, the first projects were born, the activities of which were completely focused on the online segment. For example, eBay online auction, Amazon online bookstore and search engine Yahoo! (now Verizon).

People were in euphoria from the anticipation of the opportunities that the world, united by a single network of communications, would give them in the near future. Investors also belonged to such people. Internet startups appeared daily. At the same time, the industry remained young and most people did not have a clear understanding of how to manage such a business. Huge amounts of money were invested in startups, and the valuation of companies that did not exist yesterday was inflated.

The companies themselves tried to collect investments as quickly and as much as possible. But this was only done in order to invest in marketing, increase brand awareness, raise funds again and redirect them to advertising. The slogan of that time was the expression: grow quickly or disappear.

By 1999, according to Investopedia, 39% of venture capital was funneled into internet companies.

The main exchange for such companies has become the NASDAQ technology platform. The NASDAQ index grew at an unprecedented pace: from 1000 points in 1996, the indicator of the indicator rose to 5048 by March 2000.

Back in 1996, Chairman of the Board of Governors of the US Federal Reserve, Alan Grispen, warned the market, calling the boom "irrational optimism."

A kind of culmination of the unbridled marketing expenses became January 2000. At the same time, 14 dot-com startups ordered expensive advertising during the Super Bowl, one of the most important sporting events of the year in the United States. And in March, the NASDAQ began to collapse.

What preceded the disaster

Before the market crash, there were several events that contributed to it.

To begin with, Japan - at that time the second largest economy in the world - went to. This caused a massive sale of shares in technology companies, which, according to experts at the time, could be primarily affected by the deteriorating economic climate.

Some tech companies, for example Dell, realizing that the market is at its peak and at the same time has no prospects for further growth, began to sell off own shares... The investors who noticed this also began to get rid of the securities.

The volume of investment capital declined by the end of the nineties: in the nineties, the Fed maintained a low interest rate, which contributed to the appearance of extra money for investors, but in 2000 the key rate was raised.

And one of the main reasons: investors began to understand that the companies in which they invested money had not learned how to make a profit. Moreover, such companies are unlikely to ever be able to do this, since they are not able to develop a sustainable business model. On the other hand, some entrepreneurs of that time did not even try to strengthen the business of their projects after the IPO and simply burned out money.

Here good example serves the story of TheGlobe.com dotcom founder Stephen Paternot. After the fabulous IPO of his company in 1998, Paternot, having fun in a nightclub, told reporters: “I have a girlfriend. I have money. Now I am ready to live a disgusting, frivolous life. " The 2000 crash destroyed TheGlobe.com.

But even without such spending, new companies set themselves unrealizable goals. A study by HSBC showed that the cosmic appraisal of the value of Internet companies at that time could only be adequate if these startups increased revenue by 80% annually within five years.

What happened after the bubble

When the bubble burst, only recently promising projects were left without means of subsistence. Money evaporated from the sector, and even those firms whose business was based not only on the number of clicks and loud advertising suffered huge losses. For example, shares in telecommunications company Cisco fell 86%, while Amazon shares fell 93%.

By October, the NASDAQ had plunged more than 70% from where it held in March. Some dot-com directors have been accused of fraud and defrauding investors. Banks Citi Group and Merrill Lynch had to pay fines to defrauded investors.

According to some estimates, investment funds lost about $ 5 trillion during the market crash.

Is the world in a bubble again? Or is it still not?

Several years after the 2000 collapse, the NASDAQ rose above 7,000 points. The growth in the number of companies has accelerated. If in 2008 there were 15 such startups, then in 2013 - 51, in 2018 - at least 150. According to the US National Bureau of Economic Research, on average, startups whose valuation exceeded $ 1 billion are overvalued by about 50%.

The listing of Uber and Lyft reminded many of the dot-com times - these two companies also went public with big plans and even bigger losses. Despite this, banks have estimated them at tens of billions.

According to John Colley, professor at the University of Warwick Business School, investors are once again believing in the myth. This time around, players are convinced that since there are success stories like Google, Amazon, and Facebook, most tech startups will eventually be able to find a profitable niche over time. Such investors are ready to invest money without requiring income in a year or two, but relying on it in the long term.

In a 2018 review for CNBC, analyst Keith Wright of Villanova University Business School wrote that an investor should think twice before investing in an IPO of a unicorn company. “We're officially in a bubble that's bigger than it was in 2000,” Wright said.

However, as noted by IPO expert and University of Florida professor Jay Ritter, there are significant differences. Many of today's unprofitable companies could be profitable if they downsized staff and eliminated research costs.

The same Lyft without such expenses would have shown net profit at the end of 2018. The problem is that without similar studies and marketing Lyft can say goodbye to the idea of ​​moving forward in the development of self-driving technology and lofty ambitions.

In addition, the Internet market itself has changed, said banker and investor Carol Roth. Today's technology companies have a much more developed infrastructure and a consumer prepared for the new product. According to Roth, even companies that went bankrupt in the early 2000s could succeed if they entered the market today: "In a sense, they were victims of the time in which they find themselves."

George Verbitsky recently posted a curious plaque to remind you of the 2000 dot-com bubble crash.

Yes, you need to know such things, remember them, and understand that all this can easily happen again.

But the conclusions from this table can be very different. Depending on the depth of the nuances that you are able to discern.

In my opinion, to draw a conclusion from this table only about the riskiness of buy & hold is too primitive.

The benefits of diversification are already better. The drawdowns of the broad index holders were much lower.

The benefits of a balanced portfolio are even better. Holders of portfolios, balanced by asset class, could get off with a slight fright or even earn money (for example, if the portfolio contained a stake in precious metals).

On the desirability of taking into account at least simple indicators fundamental analysis- better. Such changes could well be expected. And many expected them.

But in any case, as a reminder, the sign is useful. He who does not know history and does not learn lessons from it runs the risk of repeating it again.

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The dot-com crisis is an economic bubble and a period of stock market speculation and rapid development of the Internet in 1997-2001, accompanied by a rapid increase in the use of the latter by businesses and consumers. Then there were many network companies, a significant part of which collapsed. The bankruptcies of startups such as Go.com, Webvan, Pets.com, E-toys.com and Kozmo.com cost investors $ 2.4 billion. Other companies like Cisco and Qualcomm lost a large share of market capitalization, but recovered and surpassed the peaks of that period.

The dot-com bubble: how was it?

The second half of the 1990s was marked by an explosive development of a new type of economy, in which stock markets experienced high growth rates under the influence of venture capital and IPO-funded companies in the Internet sector and related fields. The name dotcom, which has characterized many of them, refers to commercial websites. It was born as a term for companies with Internet domain names ending in .com. The large volume of exchange transactions was fueled by the fact that this was a new industry with high potential and difficulty in assessing market participants. They were caused by high demand on the shares of this sector by investors looking for new capital investments, which also led to a revaluation of many companies in this industry. At its peak, even those enterprises that were not profitable, became participants in the stock exchange and were extremely highly quoted, given the fact that their performance in most cases was extremely negative.

Back in 1996, Alan Greenspan, then Fed chairman, warned against “irrational exuberance,” where wise investment was replaced by impulsive investment. The 2000 Nasdaq tech stock index peaked at more than 5,000, the day after a fire sell-off in tech stocks marked the end of the "new economy."

Irrational investment

The invention of the Internet caused one of the largest economic shocks in history. The global network of computers dates back to the early research work 1960s, but only after the creation of the worldwide network in the 1990s, its widespread distribution and commercialization began.

Once investors and speculators realized that the Internet had created an entirely new and untapped international marketplace, Internet IPOs quickly followed each other.

One of the features of the dot-com crisis is that sometimes the valuation of these businesses was based only on a concept outlined on a single sheet of paper. The excitement about the commercial opportunities of the Internet was so great that every idea that seemed viable could easily get millions of dollars in funding.

The basic tenets of investment theory in terms of understanding when a business will make a profit, and if it will happen at all, have in many cases been ignored because investors were afraid to miss the next big hit. They were willing to invest large sums of money in companies that did not have a clear business plan. This was rationalized by the so-called. dot-com theory: for an Internet enterprise to survive and grow, rapid expansion was required customer base which in most cases meant huge upfront costs. This claim has been proven by Google and Amazon, two hugely successful companies that took several years to show any kind of profit.

Irrational spending

Many of the new companies spent the money they received thoughtlessly. Options made employees and executives millionaires on the day of the IPO, and businesses themselves often spent money on luxury business properties because confidence in the "new economy" was extremely high. In 1999, there were 457 IPOs in the United States, most of which were organized by Internet and technology companies. Of these, 117 managed to double their value during the first day of trading.

Communication companies such as mobile network operators and Internet service providers have started to invest significant funds into the network infrastructure as they wanted to be able to grow with the needs of the new economy. Huge loans were required to be able to invest in new networking technologies and acquire wireless licenses, which also contributed to the approach of the dot-com crisis.

How.com companies became dot bombs

2000, the Wall Street tech index, the Nasdaq Composite, peaked at 5,046.86, double its value a year earlier. The next day, stock prices began to drop and the dot-com bubble burst. One of the direct reasons for this was the completion of the antitrust case against Microsoft, which was declared a monopoly in April 2000. The market expected this, and in the 10 days after March 10, the Nasdaq lost 10%. The day after the release of the official results of the investigation, the tech index experienced a large intraday drop, but returned back. However, this was not a sign of recovery. The Nasdaq began its free fall when investors realized that many unprofitable startups were indeed that way. Within a year after the dot-com crisis hit, most of the venture capital firms that backed Internet startups lost all their money and went bankrupt when new funding ran out. Some investors have begun calling the once-stellar companies "dot bombs" as they have destroyed billions of dollars in a very short time.

On October 9, 2002, the Nasdaq reached a low of 1114.11 points. It was colossal loss 78% of the index compared to its peak 2.5 years earlier. In addition to many tech startups, many communications companies also faced challenges as they had to cover the billions of dollars in loans they took to invest in network infrastructure, the payback of which was now suddenly delayed significantly longer than anticipated.

Napster history

Concerning legal issues Microsoft wasn't the only dotcom to go to trial. Another well-known technology company from that era was founded in 1999 and was called Napster. She was developing an application that enabled sharing of digital music on a peer-to-peer network. Napster was founded by 20-year-old Sean Parker and two of his friends, and the company quickly gained popularity. But due to copyright infringement, it almost immediately came under fire from the music industry and eventually ceased to exist.

Hacker multimillionaire

Kim Schmitz is arguably the best at illustrating action individual entrepreneurs regarding the dot-com crisis. This German hacker became a multimillionaire by launching various internet companies in the 1990s and eventually changed his last name to Dotcom, hinting at what made him rich. In early 2000, right before the collapse of the new economy, he sold 80% of his shares to TÜV Rheinland in DataProtect, which he founded, which provided data protection services. Less than a year later, the company went bankrupt. In the 1990s, he was a central figure in a series of insider trading and embezzlement convictions associated with his technology ventures.

In 1999, he had a tuned Mercedes-Benz which, among many other electronic gadgets, had a high-speed wireless Internet connection that was unique at the time. In this car he participated in the European Gumball Rally. when many people in expensive cars compete on public roads. When Kimble (his nickname at the time) had a punctured tire, the new wheel was delivered to him on a jet plane from Germany.

He weathered the aftermath of the dot-com crash and continued to launch new startups. In 2012, he was arrested again on charges of illegally distributing copyrighted content through his company Mega. He currently lives in New Zealand at his $ 30 million home and is awaiting extradition to the United States.

Have investors learned a lesson?

Several companies that started during the inflated dot-com bubble have survived to become tech giants like Google and Amazon. Most failed, however. Several venture entrepreneurs were active in the industry and eventually formed new companies, such as the aforementioned Kim Schmitz and Napster's Sean Parker, who became Facebook's founding president.

After the dot-com crisis, investors became wary of investing in risky ventures and returned to assessing realistic plans. However, in last years a number of high-level IPOs thundered. When LinkedIn, the social networking site for professionals, hit the market on May 19, 2011, its shares more than doubled in an instant, reminiscent of what happened in 1999. The company itself warned investors not to be overly optimistic. IPOs today are conducted by companies that have been in business for several years and have good profit prospects, if not already profitable. Another IPO in 2012 was expected for many years. Facebook's IPO was the largest among tech companies and set a record for the volume of trades and the amount of attracted investments equal to $ 16 billion.

Finally

The dot-com bubble of the 1990s and early 2000s was characterized by new technology that created new market with many potential products and services, and highly opportunistic investors and entrepreneurs blinded by early successes. Since the crash, companies and markets have become much more cautious when it comes to investing in new technologies. However, the current popularity mobile devices such as smartphones and tablets, their almost limitless possibilities, as well as several successful IPOs, opens the door to a whole generation of companies that will want to capitalize on this new market. The question is, will investors and entrepreneurs be smarter this time around so as not to create a second dot-com bubble?

The author of this article, Jose Maria Macedo, is a blockchain enthusiast, martial artist and retired professional poker player who won $ 1.6 million with $ 30 at the age of 18. He is also the founder of KitchPack and Kaizen Academy. The original material was published on the freeCodeCamp website. We offer you a translation.

Legendary investors and economists, as well as Nobel laureates such as Warren Buffett, Ray Dalio, Jamie Dimon, Robert Schiller, and Joseph Stiglitz, agree on how cryptocurrencies are considered a speculative bubble.

In this article, I intend to show what are the signs of a bubble and find out if we can talk about a bubble in relation to the current situation. I will also look at the possible consequences of a bubble, using the boom in Internet companies in the 2000s as a textbook example. Finally, I will propose a set of strategies to enable investors and long-term owners to be prepared for any contingency.

What is a bubble and is it true that we are inside it?

A bubble occurs when the value of an asset exceeds its actual value. While the word bubble sounds intimidating, virtually all new technologies have been bubbles at some point in their existence. Railroad traffic, radio, and of course the Internet were bubbles before they became widespread. To quote Union Square Ventures founder Fred Wilson:

A friend of mine made a wonderful observation. He remarked: "The implementation of all important inventions and technologies has been accompanied by irrational enthusiasm." This means that a well-known mania must have arisen in order for investors to open wallets and start financing construction. railways, or the automotive industry, or the aerospace sector, etc. These investors have lost a significant portion of their funds. However, we have also seen people invest in high-bandwidth Internet infrastructure, in software that works successfully, as well as in the database and the structure of the servers. All these developments allow us to use the Internet, which has changed our lives, and all these achievements became possible thanks to that very speculative mania.

Why do new technologies often bubble up? Because it is extremely difficult to determine the actual value new technology, resorting to traditional methods of assessment (based on the current value of future cash flows), because cash flows from new technologies are a matter of the distant future. In the case of blockchain technology, valuation is further complicated by the fact that many of the blockchains will never generate cash flow, but, despite this, will be of great value.

The cash flows that would fuel healthy enthusiasm are replaced by hype and fear of missed opportunities, and people begin to speculate on any industries in which new technologies can be introduced. Their approach can be formulated as “let's decentralize everything”. At the same time, enthusiasts care little about the technical feasibility of projects. In addition, there is no adequate assessment of the timing of their implementation. Thus, the price rises, and the effect of "social contamination" (mental interaction of members of society) begins to appear, about which Schiller wrote:

As the bubble inflates, news of the rising value enriches early investors, fueling word of mouth about their success and sparking envy and interest. The excitement is intensifying and new people are entering the market, which leads to further price increases, attracting more people and giving rise to the idea of ​​"the dawn of a new era", and so on in a spiral.

So are cryptocurrencies a bubble? The truth is that it is impossible to give a definite answer, since it is extremely difficult to reliably assess the actual value of the technology. However, there are certain signals to watch out for. In 1996, John Rothschild wrote:

Joe Kennedy, the once famous rich man, sold all his stock exchange assets on time after talking with the boy who was cleaning his shoes. The boy asked him for advice on how to dispose of several shares he bought from his own father. Kennedy realized that if it came to the point where street shoe shiners were playing on the stock exchange, then the market had collected all the money it could, and there was nothing else to catch on it.

Reading the news or browsing Facebook, I see a similar trend: investing in cryptocurrencies has become the topic of the day. Literally everyone is engaged in them, up to Paris Hilton.

There is one hopeful circumstance. The internet boom at the turn of the century was originally a purely North American phenomenon. Nevertheless, 17 years ago, the dot-com market grew to $ 3-5 trillion. Now cryptocurrencies are a global phenomenon, but so far they are worth only $ 300 billion. This means that the bubble still has room to inflate.

Bubble Survival: A Comparison to the 2000s Dotcom Bubble

Apparently, there is a widespread belief among crypto investors (of a religious nature?) That even if it is a bubble that bursts, long-term owners of the cryptocurrency will not suffer, since the market can always recover and conquer new heights.

Don't misunderstand me: the end of the bubble doesn't necessarily mean disaster if you're disciplined and your asset has real underlying value and long-term potential. History shows that most markets are recovering from crises and prices are even higher than those at the peak of the bubble. However, buying at the wrong price risks running into lingering problems in the future. For your reference, I suggest that you familiarize yourself with some statistics on the boom of Internet companies in the 2000s.

It took the tech market 17 years to get back to the value it was at during the turn of the century bubble. An analysis of specific companies leads to the same conclusion. At the peak of the bubble in the 2000s, Microsoft stock was quoted at $ 59 apiece. The rate again rose above this indicator only at the end of October 2016. If you bought stocks in mid-1999 (the prices of that period had nothing to do with the prices at the peak of the bubble in the period from the beginning to mid-2000) and decided to hold assets for a long time, then you would have to wait until August 2014 break-even points.

At the peak of the Internet bubble, CISCO's share price was $ 79. After dropping to $ 11 in 2002, it is now at $ 32 - half of its value at its peak. If you bought these shares in mid-1999, you would still be waiting for the zero-break opportunity.

Likewise, Intel shares were worth $ 73.94 at the peak of the bubble, and 17 years later they are worth $ 35.09, half the price. And if you purchased them in mid-1999, then the break-even point would have been reached in May 2014.

Even Amazon, the most successful company in the dot-com era and leading the way by a wide margin, regained its peak value only seven years later, in July 2007.

Others famous companies Internet bubble survivors such as Intuit, Priceline and Adobe also took more than a decade to recover from peak value (although, like Amazon, they not only recovered but made significant progress).

I am by no means trying to scare readers with this analysis. Rather, my goal is to show that no matter how valuable the asset being purchased, one should never forget about the price, as it may be too high. While all the companies I mentioned above were and still are very valuable and extremely successful, they had to work hard to get back the original value. Even if you manage to acquire, so to speak, Amazon in the world of cryptocurrencies (which is much easier to imagine in retrospect than to accomplish in real time), then in this case, if you make a mistake with the purchase time, you will have to wait seven years to reach the break-even point ... Keep in mind that our analysis does not cover dot-com companies that went completely bankrupt, which are the majority.

What to do?

Considering that the signs of a bubble are obvious, and it is almost impossible to calculate when it will burst, the wisest thing is to prepare for it in advance. What exactly can be done? As a former professional poker player, I often use the term expected benefit. The expected benefit is simply the sum of all possible values ​​for a random variable. Each value is multiplied by the probability of its event. The expected benefit can be used to calculate the most profitable option in any scenario. Does it sound confusing? Let's try to figure it out with numbers.

Let's say you have an amount of $ 10,000 that you intend to invest. You are 80% sure that the current situation is a bubble. When the bubble bursts, you think the market cap will decrease by 75%. However, you do not know exactly when this will happen, after two months or two years, and you believe that refusing to stay in the market during this period is fraught with a double loss of profit.

Moreover, if the bubble does burst, then the market, as you believe, will recover and in five years will return to its former level. If the crash does not occur, then the market will continue to grow and will quadruple over the same period. For the sake of simplicity, let's say that the crypto market consists only of bitcoins, the price of which is initially $ 10,000 per coin.

In this case:

If you don't trade at all, then you just keep your $ 10,000. Expected benefit = $ 10,000.

If you invest the entire $ 10,000: if the bubble bursts (80% chance), you will make $ 20,000, but lose 75% of that amount when the bubble bursts; in the end, you only have $ 5,000 left, and this amount will grow to $ 20,000 after five years. If the bubble does not burst (20% chance), then you will earn $ 40,000 over the same period. Expected benefit = 0.8 * 20,000 + 0.2 * 40,000 = $ 24,000.

If initially you stay on the sidelines, intending to invest after the bubble bursts: if it bursts (80% probability), then you invest $ 10,000 and after five years you will receive $ 40,000. If the bubble does not burst (20% probability), then Bitcoin will cost $ 40,000 and you will lose $ 40,000 (the price of a wasted opportunity). Expected benefit = 0.8 * 40,000 + 0.2 * -40,000 = $ 24,000.

If you are investing $ 2000, and you don’t use $ 8000, waiting for the end of the bubble, then: if the bubble bursts (80% probability), then you get $ 1000 from your initial investment, and then invest $ 8000. In five years, $ 1,000 will turn into $ 4,000 and $ 8,000 into $ 32,000. If the market does not crash (20% chance), then you will earn $ 8,000. Expected benefit = 0.8 * 36000 + 0.2 * 8000 = $ 30,400.

Conclusion

Of course, I presented a simplified model. You can play with the numbers and get different results with minor variations. The key thought is this: even if you are a fiery cryptocurrency enthusiast, but it seems to you that there is a non-zero probability of collapse, in order to maximize the expected benefit (that is, to get as much as possible), part of the funds should be withdrawn from the game and invested after the bubble bursts. and the prices will blow away. The more likely you see a crash, the more money you should reserve, and vice versa.

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