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Stephen Gandel

Bitcoin Bubble Makes Dot-Com Look Rational

Bitcoin tide will surely recede, but not before a surge in investment possibilities.
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Chris Ratcliffe/Bloomberg

Even compared with some extreme bubbles, bitcoins, which continued its climb toward $10,000 Monday afternoon, look bloated.

Take dot-com stocks, which were the biggest bubble of the past few decades, and likely the largest in stock market history. At the height of the dot-com stock bubble, the technology-heavy Nasdaq stock index had a price-to-earnings ratio of 175. In the past year, bitcoins have generated transaction fees of nearly $219 million. And at $9,600 a piece, the total value of all bitcoins -- their market cap -- now tops $155 billion. That gives bitcoins the equivalent of a trailing P/E ratio of 708. That means based on valuation, bitcoins are four times more expensive than dot-com stocks were at the height of their bubble.

Valuation, though, is not what pops bubbles. Supply does. The dot-com bubble, like all bubbles, was driven by the fact that there were relatively few publicly traded internet stocks in the mid-1990s, just as investors were getting excited about them. So prices of the stocks that were public soared. Companies not actually in the internet business added ".com" to their names, or announced a web strategy, and those stocks rose as well. But from 1997 to 2000, there were $44 billion in initial public offerings of new dot-com stocks. Eventually the supply of dot-com companies became large and dubious enough that the bubble burst and the hot air holding up all the stocks rushed out.