# Understanding the Dotcom Bubble: Causes, Impact, and Lessons

![Dotcom Bubble](https://www.investopedia.com/thmb/SzDheidju9m8xmcSAwtnWf4qfzk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotcom-bubble.asp-FINAL-97b80a4f3ae44b38bef25defa02127a5.png)

*— Investopedia / Hilary Allison*

## What Was the Dotcom Bubble?

The dotcom bubble, also known as the Internet bubble, epitomized a period of speculative mania that drove U.S. technology stock valuations sky-high during the late 1990s. Fueled by a fervor for Internet-based companies, equity markets experienced exponential growth, highlighted by the Nasdaq index skyrocketing from under 1,000 in 1995 to more than 5,000 by 2000. This speculation relied heavily on the promise of profitability rather than actual earnings, leading to a frenzy where investors overlooked traditional financial fundamentals.

However, as 2000 ushered in a sobering reality of widespread overvaluation, the market suffered a dramatic correction. The Nasdaq plummeted dramatically from a peak of 5,048 on March 10, 2000, to 1,139.90 by Oct. 4, 2002—a staggering decline of 76.81%. Many dotcom stocks went bankrupt, and even established companies like Cisco, Intel, and Oracle saw their stock prices erode by over 80%. This crash culminated in a prolonged financial recovery, with the Nasdaq taking 15 years to reclaim its previous high on April 24, 2015.

### Key Takeaways

*   The dotcom bubble was characterized by a rapid rise in U.S. technology stock values in the late 1990s, driven by heavy investments in Internet-based startups with little to no profits.
*   Between 1995 and 2000, the Nasdaq index experienced a five-fold increase, peaking in March 2000 before plummeting by nearly 77% by October 2002.
*   Many startups went public during this period, raising significant capital despite lacking viable business models, which ultimately led to the market collapse when investment funds dried up.
*   The bursting of the dotcom bubble resulted in massive financial losses for investors, with several high-profile tech companies losing over 80% of their market value.
*   Companies like Amazon, eBay, and Priceline managed to survive the crash, while many others went bankrupt as the market corrected itself.

  

## Exploring the Dotcom Bubble Phenomenon

The dotcom bubble, also known as the Internet bubble, grew out of a combination of the presence of [speculative](https://www.investopedia.com/terms/s/speculation.asp) or fad-based investing, the abundance of [venture capital](https://www.investopedia.com/terms/v/venturecapital.asp) funding for [start-ups](https://www.investopedia.com/terms/s/startup.asp), and the failure of dotcoms to turn a profit. Investors poured money into Internet start-ups during the 1990s, hoping they would one day become profitable. 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.

With [capital markets](https://www.investopedia.com/terms/c/capitalmarkets.asp) throwing money at the sector, start-ups were in a race to quickly get big. Companies with no unique technology ignored [fiscal responsibility](https://www.investopedia.com/articles/pf/09/financial-responsibility.asp), spending heavily on marketing to stand out. They spent a fortune on marketing to establish brands that would set them apart from the competition. Some start-ups spent as much as 90% of their budget on advertising.

> **Fast Fact**
>
> Speculative bubbles are hard to spot while happening, but are obvious afterward.

Record amounts of capital started flowing into the Nasdaq in 1997. By 1999, 39% of all venture capital investments were going to Internet companies. That year, most of the 457 [initial public offerings](https://www.investopedia.com/terms/i/ipo.asp) (IPOs) were related to Internet companies, followed by 91 in the first quarter of 2000 alone. The high-water mark was the [AOL Time Warner](https://www.investopedia.com/articles/financial-theory/08/merger-acquisition-disasters.asp) [megamerger](https://www.investopedia.com/terms/m/megamerger.asp) in January 2000, which became the biggest merger failure in history.

Ultimately, the bubble burst, causing steep losses for investors and bankrupting several Internet companies. Companies that famously survived the bubble include Amazon, eBay, and Priceline.

> **Important**
>
> The dotcom bubble is but one of several asset bubbles that have appeared over the past centuries.

## How the Dotcom Bubble Burst

The 1990s experienced rapid tech advancements, but Internet [commercialization](https://www.investopedia.com/terms/c/commercialization.asp) drove the biggest capital growth. While companies like Intel, Cisco, and Oracle drove growth in tech, upstart dotcom companies sparked the stock market surge starting 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 IPOs 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 5,048—nearly double over the prior year. Several of the leading high-tech companies, such as Dell and Cisco, placed huge sell orders on their stocks when the market peaked, sparking [panic selling](https://www.investopedia.com/terms/p/panicselling.asp) 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 reached [market capitalizations](https://www.investopedia.com/terms/m/marketcapitalization.asp) 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.

## How Long Did the Dotcom Bubble Last?

The dotcom bubble lasted about two years between 1998 and 2000. The time between 1995 and 1997 is considered to be the pre-bubble period when things started to heat up in the industry.

## Why Did the Dotcom Bubble Burst?

The dotcom bubble burst when capital began to dry up. In the years preceding the bubble, record-low interest rates, the adoption of the Internet, and interest in technology companies allowed capital to flow freely, especially to startup companies that had no track record of success. Valuations rose and money eventually dried up. This led companies, many of which didn't even have a business plan or product, to collapse, causing the market to crash.

## What Caused the Dotcom Crash?

The dotcom crash was triggered by the rise and fall of technology stocks. The growth of the Internet created a buzz among investors, who were quick to pour money into startup companies. These companies were able to raise enough money to go public without a business plan, product, or track record of profits. These companies quickly ran through their cash, which caused them to go under.

## What Caused the 2000 Stock Market Crash?

The 2000 stock market crash was a direct result of the bursting of the dotcom bubble. It popped when a majority of the technology startups that raised money and went public folded when capital went dry.

## The Bottom Line

When the Internet took off in the 1990s, many startups launched to make use of the new technology. These companies had high valuations with little to no profits, riding the wave and hype of the new tech. A booming equity market funded them in the 1990s, which came with cheap capital. The crash came when funds dried up and companies lacked the profits to continue. For some companies, there was a [brief period of price stabilization and increase](https://www.investopedia.com/terms/e/echobubble.asp), but these were short-lived. [Most of these companies went bust](https://www.investopedia.com/money-when-fintech-company-fails-8759418).

> **Article Sources**
>
> 1.  Nasdaq. "[NASDAQ Composite Index (COMP). COMP Historical Data](https://www.nasdaq.com/market-activity/index/comp/historical)."
>     
> 2.  Money Morning. "[The Dot-Com Crash of 2000-2002](https://moneymorning.com/2015/06/12/the-dot-com-crash-of-2000-2002/)."
>     
> 3.  Wired. "[Tech Boom 2.0: Lessons Learned From the Dot-Com Crash](https://www.wired.com/insights/2013/08/tech-boom-2-0-lessons-learned-from-the-dot-com-crash/)."
>     
> 4.  The Washington Post. "[AOL to Acquire Time Warner In Record $183 Billion Merger](https://www.washingtonpost.com/archive/politics/2000/01/11/aol-to-acquire-time-warner-in-record-183-billion-merger/f3bf2f07-c32b-4052-b5a6-8489bb9d7013/)."