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Will crypto winter go the way of the dotcom bust? The CEO of SDF explains

Denelle Dixon of Stellar Development Foundation says understanding the similarities and the differences of the dotcom bust is critical to making sure that we emerge from crypto winter even stronger.

[Source photo: juliannafunk/Getty Images; Kanchanara/Unsplash]

The onset of the crypto bear market over the last six weeks, and the downfall of high-profile projects resulting in some estimated $2 trillion in crypto losses caused a lot of debate about the future of crypto. Comparisons are being made between the blockchain industry of today and the dotcom bubble of 2000.

Having worked through the evolutions of Web 1.0, 2.0, and now 3.0, let me answer the question: Is this crypto’s moment of implosion? No.

There is certainly room to argue similarities: rising interest rates, a regulatory environment challenged to keep pace with innovation, pricey marketing tactics to grow the user base, and very enthusiastic venture capital investment. There are also some important differences: risky dependence on leverage and lack of or limited consumer education.

Understanding the similarities and the differences is critical to making sure that we emerge from crypto winter even stronger. What can the past and present tell us about how we deliver this transformational technology to the masses so it lives up to its origin story as an equalizer to financial access? Here’s my take.


In March 2000, I was an associate at a law firm representing the newest and most innovative technology companies in the dotcom space. At the time, the business opportunities on the internet were uncharted. Regulation was arcane. We were navigating how to draw boundaries based on statutes that had nothing to do with and had never contemplated the digital world.

What were the monetization opportunities for “internet companies?” Where did privacy factor in? What did terms of service look like, and how did you actually get users to agree to them?

We were operating in the gray, with nothing set in stone, and challenged by the significant (and motivating) opportunity to define and set the standards for the future. The regulatory environment was trying hard to catch up with technology—which was an opportunity, coupled with the risk that regulation would be reactionary or based on limited understanding of the tech stack. (Sound familiar, crypto natives?)

Everything felt like it had the potential to transform consumers’ lives. In retrospect, some of that was thanks to marketing hype (I’ll touch on that next), but the staggering explosion of websites and companies launching on the internet was real. Between 1999 and 2000, the number of websites alone grew from 3,177,453 to 17,087,182. That’s 528% in just one year!

Do you remember pets.com? I do. It’s a company often used to showcase the excess of the dotcom days of 1998. With two rounds of funding, pets.com netted more than $110 million. By 1999 and into 2000, it was burning through its funding with huge marketing campaigns—a spot in the Macy’s Thanksgiving Day Parade, an ad in the Super Bowl, TV appearances on national networks—paired with a business model that cost too much to bring in new customers and to deliver products nationwide. The company went public in February 2000, and by November it was out of money.

There are a few factors most commonly used to explain the dotcom bust. One was that companies were being built on customer growth strategies like heavy marketing and selling products at a loss to maximize market share. Another that IPO-crazed companies and investors led to a chasm between valuation and profitability.

Just consider that 199 internet stocks (totaling $450 billion in market cap) were representative of companies whose total annual sales combined hit $21 billion, and losses totaled $6.2 billion. And more macro economic shifts, like low interest rates in 1998, created an environment ripe for entrepreneurs who then saw interest rates get raised three times over the course of 1999.

In hindsight, it’s not surprising the bubble burst. Frankly, even at the time it wasn’t a huge shock to those of us paying attention, seeing unsustainable prices and valuations collide with reality. At the same time that institutional investors started cashing out, individual investors were buying into dotcom companies—and sadly, were left holding the bag, with 70% of 401(k)s losing at least one-fifth of their value. Big investment dried up and unprofitable companies found themselves without a runway and without a sustainable customer base.

Shortly after the bubble burst, regulation tightened and technology started to consolidate around a few big players with the resources to outlast the brutal bear market that ensued. Unfortunately, these decisions ultimately created many of the problems we have on the web today.


Some of this seems familiar when you think about what is happening today in crypto (I mean, did you see the Super Bowl ads this year?). In the last year, more than 1,200 crypto companies led funding rounds, accounting for a total of $25 billion in investment. In just the first half of 2021, CoinMarketCap added 2,655 new crypto assets, bringing the total number of listed coins to 10,810.

The past 12 months have been an insane journey through attention-grabbing headlines about how to earn yield, which smart contracts are best, how to utilize decentralized autonamous organizations (DAOs), and whether you have a nonfungible token (NFT) made for you. Macy’s even offered one for Thanksgiving last year. The economy was humming along, interest rates were crazy low, capital was flowing freely, and valuations were high. All of this was happening . . . until it wasn’t.

Unlike the dotcom bubble burst, access to capital wasn’t a trigger for where crypto is today. In fact, capital was abundant. In the first quarter of 2022, there was $9.2 billion in total investment, a new high from the previous record set in the fourth quarter of 2021. And capital, while slowing down in the current economic climate, is still flowing: $4.219 billion in May, which is still up 89% from May last year. And crypto is very visibly marketing: celebrity endorsements, crypto stadiums and sponsorships, mainstream advertising.

So, what is contributing? Yes, interest rates are rising. Yes, the stock market is under pressure and the connection between it and crypto became evident this cycle. And yes, to an extent, some crypto businesses haven’t figured out true revenue models yet have high valuations and access to a lot of capital.

But I’d argue the main factor for crypto’s downturn is driven by unsustainable yields and subsidies. Seeking an edge to capitalize returns results in an overreliance on cheap borrowing. The backing of digital assets on borrowed capital to drive these unbelievable (translate to unsustainable) returns, otherwise known as leverage.

Take Terra. Immediately before its fall, Anchor, a crypto lending platform, was offering 20% yield for users to lend UST (20%?!). Unfortunately, people still love to believe in things that seem too good to be true. According to Time, Terra’s team knew this didn’t add up, that it wouldn’t be possible to offer this return to everyone, but justified it as a marketing spend as a form of customer acquisition. (Hello again, pets.com.)

So when market volatility hit, which seems to have originated from investors looking to short-sell UST, Terra’s subsidized yields were hollow. Terra was over-leveraged and couldn’t handle the bank run. Ultimately, individual investors took the hit and lost millions.

Terra was first, but then a month later came Celsius. And the story is similar. Celsius touted high-yield returns on deposits, to the tune of 17%. Its loans were largely collateralized with bitcoin. So when bitcoin and the crypto market started to dip, Celsius customers came rushing to withdraw, only to find that they couldn’t. Celsius had halted withdrawals because it had built a strategy around unsustainable, outsize returns and leverage. Without foundational assets, it didn’t have the liquidity to give customers their money.

Unfortunately, Terra and Celsius are not the only crypto companies with shaky foundations. We’ll probably see more tumble as crypto winter continues.

So, what happened? To put it bluntly, people got greedy. Or, more nicely put, people got caught up in the excitement. And, unfortunately, some of those people couldn’t afford it. Regulation always follows consumer harm—which is why we need to make sure that as an industry we are providing road maps, guideposts, and words in flashing bright lights about the risks. If individual investors are left holding the bag, like in the dotcom bust, we lose trust. When we burn consumer trust, we hurt the industry.


Just to be very clear on this point, this is nowhere near the end of crypto. In fact, it is just the beginning. This is certainly going to be a tough time for the industry, but it is going to challenge us to mature, in the same way that the dotcom bubble changed the trajectory of internet companies.

The internet survived the bubble bursting in 2000. But it did force surviving and new companies to focus on real products with viable business models. If selling pet supplies that are delivered right to your door at unbelievable prices seems too good to be true, then guess what? It probably is. After the bubble, pets.com and others had no choice but to figure out what being a successful, sustainable internet company actually looked like.

That’s what we need to reflect on. This should be a humbling moment for all of us in blockchain and crypto, taking it as a challenge to prove the real-world practical value we can bring to the mainstream. For crypto to get back to its core, the true value of what makes this technology transformational for businesses and consumers, we need to focus on things like interoperability, transparency, innovation, accessibility, inclusion, and decentralization.

We need to avoid the biggest risks facing crypto today. That would be the risks to consumers, putting them in positions where their entire life’s savings evaporate in hours, and the risk of centralization, and turning to consolidation as a means to outlast the current market environment. That’s where we risk stifling innovation, competition, and the ethos that guides so many in the industry who believe in this technology as the means to an open, accessible financial system.

These are the lessons we need to learn now and the decisions we need to make to set the course for crypto’s future.


Denelle Dixon is the CEO and executive director of the Stellar Development Foundation. More

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