Crypto Investing: Lessons to Learn from the Dot Com Bubble, Say Advisors

"Blockchain and Cryptocurrency Craze: A Déjà vu of the Dot-Com Bubble?"

As the saying goes, history repeats itself, and the current rush of interest in blockchain and cryptocurrency investing feels very similar to the early demand for technology stocks in the 1990s. During the dot-com bubble, investors saw the developing value of tech and stock prices soared based on the promise of vast wealth creation and disruption. However, as we learned in the subsequent “tech wreck” of the early 2000s, expectations have nothing to do with reality, and many investors lost everything, including what they made in the previous bull market.

Investors need to separate the hype of revolutionary technology from the actual prospects for commercialization. This is incredibly difficult for the average investor, as well as financial advisors who are trained to counsel prudence and caution while surrounded by insanity. In the 1990s, many advisors’ clients wanted all-in on tech stocks. Clients were losing faith in their advisors because diversification wasn’t working. During the bubble period, the Nasdaq Composite index, which is heavily weighted towards technology stocks, rose from around 1,000 in 1995 to a peak of 5,048.62 on March 10, 2000. This represented an increase of more than 400% in just five years. During that same time, the S&P 500 also performed very well, rising over 200%, but that wasn’t good enough when the Nasdaq was up almost double.

It was challenging for even the most trusted advisors to convince clients to avoid the “shiny object” and stay the course with a diversified portfolio of stocks and bonds. Unfortunately, many clients lost faith entirely and took matters into their own hands, either becoming day traders or investing all of their money in the famous Janus Twenty fund, which at its peak grew to a whopping $88 billion. Notably, this fund invested in just 20 stocks, with their top holdings in companies like AOL, Cisco and Qualcomm. By the end of 2002, this fund’s assets under management had fallen to around $12 billion.

As an advisor, it is essential to take a different approach. Rather than alienating the client by telling them what not to do, it is far more useful to build a collaborative process. Many clients of financial advisors may be feeling the same anticipation around digital assets. Like internet technology, blockchain has real, tangible, long-term use cases. However, telling the client to “go it alone” is not the answer. With all of their eggs in one basket, they took massive losses. I would argue that many of these clients would have worked with their financial advisor if their advisor had simply offered a more open and welcoming approach toward digital assets.

The lesson learned through the dot-com bubble is that taking a conservative stance toward investing in a new asset class makes sense, but it doesn’t have to be binary. There is a way to exercise caution while still giving clients exposure. Small doses of the speculative asset class help satisfy the client’s urge to go “all in” while protecting them from the inevitable upheaval that comes with major innovation. This gives the future chance to look back and say that investors were given a chance to embrace opportunity and the excitement of change while still maintaining a balanced, rational investment strategy.

The fact that blockchain technology is stirring up the market is a sign that it’s working. Like the Internet, it’s disruptive by nature, making the highs and lows we’ve weathered over the last year symptoms of positive change. We’re in the early phases of blockchain tech today, but we’re rapidly approaching broader innovation, with cryptocurrencies making way for the tokenization of real-world assets that are spurring revolutionary changes in the distribution of investment opportunities.

Before we know it, there will be innumerable ways to invest in digital assets on behalf of clients. Just as various businesses now leverage tech, blockchain has the potential to permeate across and benefit a wide swath of industries. All of that is to say, it makes sense that investors want in on digital assets. With guidance, we can enable them to engage the market behind tomorrow’s exciting possibilities thoughtfully and, more importantly, securely.

Martin Reid

Martin Reid

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