Fintech

The dot-com crash has lessons for crypto, if only we can remember them

Crypto’s meltdown has stirred memories of the 2000 tech crash.

A crypto token reading a book called "History of the Dot-Com"

From the wreckage of the crypto crash, proponents argue, viable businesses are poised to emerge.

Illustration: Christopher T. Fong/Protocol

The dot-com crash saw the collapse of high-flying startups that first commercialized the web. It also set the stage for Jesse Powell’s debut as a tech entrepreneur.

“All the companies that blew up were liquidating their laptops and office equipment,” the Kraken co-founder told Protocol, recalling how he built a business by going to startup bankruptcy sales during the crash. “I was buying stuff and selling it on eBay.”

Fast-forward two decades: Instead of bankruptcy fire sales, Powell now runs a tech powerhouse of his own, one of the world’s largest crypto exchanges estimated to be worth $11 billion that has raised more than $125 million in funding.

The role has become freshly challenging as Powell finds himself having to navigate a market meltdown with eerie similarities to the turn-of-the-millennium tech-stock crash.

Layoffs, bankruptcies and the rapid evaporation of wealth — the parallels are everywhere. The dot-com crash wiped out about $5 trillion in investments, far more than the $2 trillion lost in the total market value of cryptocurrencies over the past seven months. It marked the end of the go-go ’90s.

The crypto crash is a less isolated phenomenon: It coincides with a global economic slowdown triggered by inflation, rising interest rates, the lingering COVID-19 pandemic, supply chain chaos and the war in Ukraine.

But it’s also in some ways more isolated, with far fewer households holding crypto now than had tech stocks in their portfolios during the dot-com boom. Despite recent warnings about crypto’s potential to create international “financial stability risks,” it’s expected to have limited impact on the global monetary system.

Ripple CEO Brad Garlinghouse, who ran telephony startup Dialpad in 2000 and 2001, said the crypto crash, like what happened two decades ago, is about how “excitement got ahead of reality on some of these things.”

“There was a bunch of leverage built into the system and we had an unwinding of that,” he told Protocol. Citing the UST stablecoin collapse that helped fuel the crypto slump, he added, “Terra-luna was the first shoe to drop. Maybe there's gonna be more shoes to drop.”

But, said Garlinghouse, “The market isn't going away. The opportunity isn't going away.”

The new new thing

Like the crypto craze, the dot-com boom was sparked by excitement about a new technology.

Invented in 1989 by British computer scientist Tim Berners-Lee, the World Wide Web made the internet far more useful, unleashing a wave of venture-backed Silicon Valley startups offering new products and services based on the groundbreaking technology.

The trend triggered a Silicon Valley job boom and a rash of high-valuation IPOs from which emerged a swaggering culture. The era became known for “irrational exuberance,” said Jef Loeb, a longtime advertising executive who worked during the dot-com boom. He recalled how his agency worked on a quirky ad campaign for CyberCash, an online payments startup considered a pioneer of digital wallets. The campaign extolled the get-rich-quick virtues of the internet.

“There’s only one way to end prejudice against the rich — by joining them,” the narrator says in the campaign, called “The Partnership for a Filthy Rich America.” (In a way, it foreshadowed the crypto bros’ enthusiasm for rapid wealth creation, a 2000-era version of the contemporary meme “Have fun staying poor.”)

Rob Siegel, a management lecturer at the Stanford Graduate School of Business, said “there was definitely hubris” when dot-com companies spoke openly of replacing the “old economy.”

Some companies founded in the late ’90s went on to become titans: Amazon, Google, Salesforce and Netflix. But many startups went out of business, including companies that went public with inflated valuations and wobbly business strategies.

Affirm CEO Max Levchin, who was co-founder of dot-com success story PayPal, said it was a time of “really good ideas” but also “things that just didn’t need to exist and were overblown,” which left him with an important lesson about business. “A really good rule of thumb from the mid-’90s is that some things just look too good to be true,” he told Protocol.

Garlinghouse, who also served as a Yahoo executive, recalled a site called DrKoop.com, founded by the eponymous former Surgeon General C. Everett Koop, which raised over $84 million in its 1999 IPO even though some people questioned the financial potential of a medical information site. “Obviously, the skeptics were right,” Garlinghouse quipped. DrKoop.com folded in 2001.

Some startups were simply way too early. Katherine Dowling, chief compliance officer and general counsel at Bitwise, worked as an investment banker on the Webvan IPO. The online grocery store went public in November 1999 and filed for bankruptcy in July 2001. It was “definitely a case where they were ahead of their time and you just didn't have enough people online,” she said.

And in the early years of the web, building an online business entailed huge costs. There was no cloud, which meant startups had to buy hardware from companies like Sun Microsystems. “People with spiked hair were throwing money at us saying, 'Where's my server? Where's my server?'” former Sun Microsystems CEO Scott McNealy recalled in 2002.

In the spring of 2000, the party ended. After a stunning five-year rally, the Nasdaq began a steep slide that lasted nearly three years.

The many crashes

The crypto industry has gone through many steep downturns since bitcoin was introduced in 2009. The Mt. Gox exchange crash in 2014 wiped out 850,000 bitcoins then worth $473 million. Many crypto executives cite their experience with the 2017-2018 “crypto winter” in dealing with the current market.

That’s what makes the crypto crash different from the dot-com crash, said Silicon Valley forecaster Paul Saffo. “The dot-com bubble had one big crash and then recovered,” he told Protocol. “I think what we’re going to see is a succession of bubbles and we’re going to crash our way multiple times in the process of trying to figure out where crypto fits into our lives.”

The crypto meltdown has underscored that debate. Dot-com veterans cite a key difference from what happened two decades ago.

Expensify founder and CEO David Barrett, who began his career as an engineer during the dot-com era, recalled that many dot-com startups “weren’t good businesses,” but at least they “actually sold products you could buy,” he told Protocol.

Despite the dot-com meltdown, Siegel said, it became clear that there were many viable use cases for the web: “People understood shopping online. People understood digital entertainment. People understood a lot of the things that we still do today, two decades later. We are still buying stuff on Amazon. We are still getting information from Yahoo and Google. We are sending emails.”

Webvan and Pets.com, both online stores, were spectacular dot-com failures, but Instacart and Chewy subsequently embraced their ideas and thrived. Garlinghouse noted that while DrKoop.com was a flop, another medical information site, WebMD, became successful.

The dot-com era also paved the way for investments that led to faster growth of survivors like Google and Amazon. The telecom bubble that accompanied the internet bubble meant that fiber-optic networks were in place to link data centers to ever-faster home broadband connections, which became huge drivers for ecommerce.

The startups founded after the crash concluded that spending small fortunes on in-house servers didn’t make sense. Cloud computing helped spur a wave of cheaper, faster innovation.

It’s possible that developments in crypto spurred by the boom, from faster blockchains to more-secure wallets, will lay the groundwork for a similar wave of new companies.

Fuel for skeptics

The crypto crash has fostered doubts about where the industry is headed. Some of crypto’s fiercest skeptics come from the tech industry.

“It’s all lies. It is 100% false,” Expensify’s Barrett thundered. “Cryptocurrency is just a giant Ponzi scheme.” Bill Gates dismissed NFTs as a trend “based on greater fool theory.”

Of course, that was a swipe used against the dot-com mania: Remember David Letterman making fun of Gates for touting the internet in 1995?

Others are less dismissive, but they also point to glaring differences between the crypto meltdown and what happened more than 20 years ago.

Like the dot-com boom, the crypto rally has featured a get-rich-quick craze. Siegel pointed to what he called an “almost religious, philosophical discussion on the benefits of blockchain and crypto.”

“It feels more condescending this time, this notion of, ‘You're too stupid to understand us,’” he said. He also argued that with crypto, “we haven't seen real usage models take off” at scale. “The nature of the implosion is pretty much similar. But we're still sitting there scratching our heads, going, ‘Well, now what?’”

Loeb said, “You aren’t seeing crypto executives emulating their dot-com counterparts in talking about ‘returning to basics’ and ‘lessons learned.’ Instead, for better or worse, crypto is just doubling down on FOMO. The prevailing mantra: ‘You don’t really lose until you step out of the game.’”

The crypto game, of course, is about money — sometimes even people’s life savings.

“What is the cost of being wrong if you screw up a two-hour delivery service?” Nick Selby, a vice president at Trail of Bits, a security research organization, and another dot-com veteran, told Protocol. “It's not really that much, right? Tell somebody to put 9% of their 401(k) into something that isn't really tested. It's a different set of risks.”

The crash has highlighted those risks. Financial economist Frances Coppola said that while crypto has endured slumps in the past, the current downturn is different, marked by growing inflation, rising interest rates and the end of the “era of plentiful dollars” for crypto.

“If you can’t exchange your virtual dollars for real dollars, your wealth is an illusion,” she wrote.

Crypto’s promise is still essentially an illusion, Siegel suggested: “I am not sitting here saying the technology won't matter longer-term, I'm just saying everything right now is a hypothesis.”

The bull case for crypto

Crypto industry leaders push back on these criticisms. Powell affirmed the view that what’s happening in crypto is “part of the recurring cycle that we see every few years.”

“Everything is going in the right direction,” he said. “I just get more and more bullish over time. I think the use cases for crypto are starting to get more apparent to more people.”

Bitwise’s Dowling disputed the view that there’s more hubris in crypto. What’s different now, she said, is the “expansive social media and online presence” that amplifies crypto debates.

Garlinghouse acknowledged that there have been questionable crypto offerings, like DeFi lending products with astoundingly generous yields. Ripple stayed away from that, he said: “We didn't understand how this is going to really be sustainable.”

But he also pushed back on the idea that there’s not real value in the blockchain technology that undergirds crypto. Ripple’s payments volume is setting records — an annualized $10 billion, he said recently on Twitter — and is still growing. “At what point do we agree that that’s scale?” he said.

Lawrence Newhook, president of crypto asset management company DigitalArray, makes a distinction between cryptocurrencies — some of which he has said “could be a goose egg” in the long run — and blockchain technology, which he argues clearly has potential and is being embraced widely.

“Remember three, four or five years ago, the promise was everybody was gonna be buying their lattes at Starbucks with bitcoin. Whatever happened to that?” he told Protocol. “If you're just talking about cryptocurrencies, I would agree that's been one of the biggest letdowns.”

But there’s clearly more to crypto than trading altcoins and setting up Ponzi schemes.

From the wreckage of the crypto crash, proponents argue, viable businesses are poised to emerge.

Newhook cited growing interest in a field called permissioned blockchain, in which regulatory compliance plays a critical role. “That's going to be sobering for a lot of the crypto bros,” but “the first folks that figure out how to do regulated permissioned DeFi are gonna win,” he argued.

Powell argued that “use cases for crypto are starting to get more apparent to more people.” The Lightning Network payment protocol meant to speed up bitcoin transactions “is growing in adoption,” he pointed out. Lightspark, founded by former Meta payments executive David Marcus, recently raised $175 million to develop Lightning technology.

Garlinghouse also cited NFTs, noting that “people have appropriately been critical of some of the hype cycle” around a market that exploded last year, then took a hit in the crypto downturn.

Bored Apes are one thing. But ideas based on the “tokenization of assets to make them more tradable and to build smart contracts around them” are “compelling,” he said.

“If you make the conclusion that the meltdown of art-based NFTs equates to ‘NFTs aren't a thing,’ I think that'd be a massive failure of logic,” he said.

“When Pets.com went out of business, and when Webvan failed, most people didn't say the internet isn't really a thing,” Garlinghouse said.

Actually, many people did say that — and they were proven wrong in the long run.

“The point I would make is: Crypto is absolutely here to stay,” Garlinghouse said. “It's very clear the industry is here to stay and will continue to grow.
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