What was the 'Dotcom Bubble'

The dotcom bubble was a rapid rise in U.S. equity valuations fueled by investments in Internet-based companies during the bull market in the late 1990s. During the dotcom bubble, the value of equity markets grew exponentially, with the technology-dominated NASDAQ index rising from under 1,000 to more than 5,000 between 1995 and 2000.

BREAKING DOWN 'Dotcom Bubble'

The dotcom bubble grew out of a combination of the presence of speculative or fad-based investing, the abundance of venture capital funding for startups and the failure of dotcoms to turn a profit. Investors poured money into Internet startups during the 1990s in the hope that those companies would one day become profitable, and many investors and venture capitalists abandoned a cautious approach for fear of not being able to cash in on the growing use of the Internet.

How the Dotcom Bubble Burst

The 1990s was a period of rapid technological advancement in many areas, but it was the commercialization of the Internet that led to the greatest expansion of capital growth the country had ever seen. Although high-tech standard bearers, such as Intel, Cisco and Oracle were driving the organic growth in the technology sector, it was the upstart dotcom companies that fueled the stock market surge that began in 1995.

The bubble that formed over the next five years was fed by cheap money, easy capital, market overconfidence and pure speculation. Venture capitalists anxious to find the next big score freely invested in any company with a “.com” after its name. Valuations were based on earnings and profits that would not occur for several years if the business model actually worked, and investors were all too willing to overlook traditional fundamentals. Companies that had yet to generate revenue, profits and, in some cases, a finished product, went to market with initial public offerings that saw their stock prices triple and quadruple in one day, creating a feeding frenzy for investors.

The NASDAQ index peaked on March 10, 2000, at 5048, nearly double over the prior year. Right at the market’s peak, several of the leading high-tech companies, such as Dell and Cisco placed huge sell orders on their stocks, sparking panic selling among investors. Within a few weeks, the stock market lost 10% of its value. As investment capital began to dry up, so did the lifeblood of cash-strapped dotcom companies. Dotcom companies that had reached market capitalization in the hundreds of millions of dollars became worthless within a matter of months. By the end of 2001, a majority of publicly traded dotcom companies folded, and trillions of dollars of investment capital evaporated.

RELATED TERMS
  1. Tech Bubble

    Tech bubble refers to a pronounced and unsustainable market rise ...
  2. Bubble Theory

    A school of thought that believes that financial bubbles (assets ...
  3. Housing Bubble

    A housing bubble is a run-up in home prices fueled by demand, ...
  4. Speculative Bubble

    A speculative bubble is a spike in asset values within a particular ...
  5. Echo Bubble

    Echo bubble is a post-bubble rally that becomes another, smaller ...
  6. Siliconaires

    Slang referring to young dotcom entrepreneurs in their 20s and ...
Related Articles
  1. Investing

    Economic Bubble: Toil And Trouble!

    You might like the idea of profiting from a bubble, but you’d probably like to avoid suffering from its aftermath. Here is how an economic bubble works.
  2. Tech

    What If a Cryptocurrency Bubble Isn't That Bad?

    There is a gold-rush mentality swirling around ICOs and cryptocurrencies. If it's a bubble, is there an upside?
  3. Trading

    Here's What's Next for the Bitcoin Bubble

    Expect more rivals to make the scene and take market share from Bitcoin.
  4. Insights

    5 Steps Of A Bubble

    Bubbles are deceptive and unpredictable, but by studying their history we can prepare to our best ability.
  5. Investing

    The Single Number Preventing a Trump Bull Market

    The value of stocks doubled to 169% of GDP under Obama, making a sustained bull market unlikely under Trump
  6. Insights

    Economic Meltdowns: Let Them Burn Or Stamp Them Out?

    Whether the Fed should intervene in market bubbles is up for debate. Learn about both sides here.
  7. Tech

    Bitcoin Price Swings Resemble Dotcom Crash: Morgan Stanley

    Bitcoin's wild price swings are mimicking the chaos that erupted before the Dotcom Crash, says Morgan Stanley.
  8. Investing

    The Tech World Sees Number of “Unicorns” Boom

    As the number of tech startups valued over $1 billion begins to level out, we evaluate the changing nature of private valuations.
  9. Small Business

    Is the Private Equity Bubble Still Expanding? (GS)

    Learn about the factors influencing valuations in the private equity market. Find out if there is a private tech bubble and if it is growing in 2016.
RELATED FAQS
  1. Why Did Dot-com Companies Crash So Drastically?

    The dot-com bubble resulted from a flood of capital into companies with shaky business models. Read Answer >>
  2. What did Knight Trading Group do to incur a $1.5 million fine for violating trading ...

    The dotcom boom accelerated many deceitful business practices that first became apparent during the '80s and '90s. Many of ... Read Answer >>
  3. How do investors "chase the market"? It this a bad thing?

    Generally, an investor "chases the market" when he or she enters into a highly priced position after the stock price has ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center