From the Internet to the AI hype: How history repeats itself

What warning signs could investors have recognized before the 2000 market crash? This question is being asked again today—not about the dotcom bubble itself, but about the current euphoria in the AI sector. On November 20, 2025, the Nasdaq Composite Index lost over 2% of its value and fell to 22,078.05 points, nearly 8% below the record high from three weeks earlier. The Fear & Greed Index stood at just 7 points, signaling “extreme fear.” But before we panic, it’s worth looking back at the Dotcom Bubble—that turning point in financial history that teaches us how to distinguish genuine innovation from wild speculation.

The catastrophe of 2000–2002: How quickly a fortune disappears

To understand the present, we first need to reckon with the ruins of the past. After its peak in March 2000, the Nasdaq Composite experienced an unprecedented collapse: the index volume dropped nearly 78% in just two years. Companies that months earlier were celebrated as embodiments of limitless potential lost trillions of dollars in market capitalization. The destruction was not limited to big players—thousands of startups vanished, entire office complexes in Silicon Valley stood empty, and tens of thousands of workers lost their jobs.

One example highlights the absurdity of those years particularly well: Cisco Systems. At the height of the speculation bubble, the company was temporarily the most valuable in the world. Its stock price climbed up to $82. But after the 2000 crash, while the stock recovered somewhat, the historic high has not been surpassed to this day—more than 25 years later. Cisco survived, unlike tens of thousands of others, but this fate illustrates a bitter truth: even industry leaders were radically overvalued back then.

How does a bubble form? The four phases of the Dotcom Bubble

Phase 1: Innovation meets capital (Mid-1990s)

In the mid-1990s, the internet transitioned from a technological niche to an everyday tool. With more affordable PCs and growing internet connections, millions of households went online for the first time. Companies recognized the revolutionary potential: distribution could be globalized, marketing targeted, and customer interaction automated.

This breakthrough coincided with the perfect financial storm. Silicon Valley experienced a golden age of venture capital funding. Venture capital firms began bidding against each other for every internet startup promising to revolutionize an established industry. A vicious cycle emerged: the more capital flowed in, the more founders stepped forward to grab it. Every venture capitalist feared missing out on the next Amazon or Yahoo and pushed themselves to participate. Investment pitches shifted from financial forecasts to shiny stories about market share, scalability, and “speed."

Phase 2: Madness takes over (1998–1999)

By 1998, hope had turned into euphoria. The Nasdaq shot almost vertically upward as a flood of technology and internet companies went public. IPOs doubled or tripled their stock prices on the first trading day. To retail investors, it seemed like a guaranteed path to quick wealth.

Companies with barely any revenue, no profit, and often completely unclear business models reached valuations in the billions. The mere addition of “.com” to a company name could cause stock prices to explode overnight. Traditional metrics like earnings and cash flow were discarded as outdated remnants of the analog era. Instead, new metrics were invented—website traffic, user numbers, user acquisition speed—all promising: “Profitability will come soon!”

Media coverage fueled the firestorm. CNBC, business magazines, and established newspapers celebrated young entrepreneurs who rose from dorm rooms to multimillionaires. The myth of the overnight tech millionaire became a cultural obsession. Day trading became a national passion, as retail investors opened online brokerage accounts and speculated on momentum gains. Diversification was declared outdated, and concentration in tech stocks was considered virtuous.

Phase 3: Cracks become visible (End of 1999 to early 2000)

By the end of 1999, the excesses were undeniable. Price-to-earnings ratios in the tech sector reached unprecedented extremes. Many companies were valued so highly that even optimistic growth scenarios would have taken decades for their profits to justify the stock prices.

But behind the scenes, a silent disaster was brewing. Many dotcom companies burned through their cash at an alarming rate. Their business models required continuous new capital inflows—to acquire customers, build infrastructure, finance aggressive marketing campaigns. Profitability was not just postponed; it was in the distant future. Quarterly reports showed rising losses, but instead of warning signs, these were reinterpreted as evidence of “hypergrowth.” The prevailing logic was: size is everything. Profits will come once the market is dominated.

In early 2000, the macroeconomic environment darkened. The US Federal Reserve, concerned about overheating, began raising interest rates. Higher borrowing costs cut off the lifeline of unprofitable tech firms. At the same time, leading tech giants reported disappointing figures. The aura of inevitability that had surrounded the sector began to crumble. Investors started to reassess their expectations. Sentiment shifted—not gradually, but dramatically—from euphoria to fear.

The parallels to today’s AI mania

Today, similar scenes are unfolding—only with a new actor: Artificial Intelligence. Markets have rewarded the AI sector with extraordinary valuations, much like they once did with the internet. The narrative is almost identical: “This time, everything is really different.” It was claimed back then that the internet had rewritten fundamental economic principles. Today, the same assertion is made about AI.

But while genuine innovation can indeed be transformative, history shows a cautionary pattern: neglecting disciplined valuation methods rarely ends well. The comparison between Nvidia and Cisco is instructive here. Both dominated their respective technological waves and held central infrastructure positions. However, Nvidia differs in critical ways: it already generates massive cash flows, has genuine pricing power, and benefits from tangible, noticeable demand for its products. This is fundamentally different from most favorites of the Dotcom Bubble, which never produced significant profits.

Nevertheless, a warning remains: if expectations shift from realizable, long-term returns to overblown speculation, even strong fundamentals can be overwhelmed.

The survivors: what the crisis taught

From the wreckage of the dotcom bubble, a few survivors emerged that still shape the digital landscape today: Amazon, eBay, and some others drastically adjusted their business models. They focused on operational efficiency and pursued long-term profitability strategies instead of short-term hype. Their resilience revealed a crucial lesson: speculative bubbles may burst, but truly transformative technologies endure.

A paradox of interests: while the tech sector collapsed, the overall economy did not enter a recession. The housing market, energy sector, and consumer goods sector remained relatively stable, cushioning the damage.

The timeless lesson for investors

Cash flow is king. Not stories. Not user numbers. Not attention. Not “potential.”

Markets may reward companies temporarily for rapid growth or visionary storytelling. But lasting value is only created by companies that turn innovations into repeatable, profitable results. Operational efficiency, practical utility, and sustainable margins are the true fabric of successful companies.

Yet, investor psychology rarely changes. FOMO, herd behavior, and narrative distortions repeatedly push asset prices beyond reasonable limits. The dotcom bubble remains the archetype for understanding modern speculative mania—a stark warning that even technologies capable of changing the world can experience corrections that are just as world-changing if expectations run ahead of reality.

The central question today is no different from that of 1999: how much of this enthusiasm reflects genuine long-term potential, and how much is pure speculative excess? Those who find the answer will prosper. Those who ignore it will become impoverished.