The term dot-com bubble refers to the rapid increase in the value of companies conducting business in the technology sector. The dot-com bubble expanded from the years 1995 through 2000, with the Nasdaq Index rising from around 1,000 to just over 5,100.
The dot-com bubble is an example of an economic bubble. These bubbles are formed when investors hold unrealistic views of an asset’s value. The lifecycle of a bubble occurs in two phases, starting with a rapid expansion of the prices of assets. The cycle ends when the bubble bursts, and the value of the same assets fall quickly.
The dot-com bubble was a result of extreme investor speculation, during which the value of companies in the internet sector reached levels not justified by their fundamentals. Investors recognized the potential growth opportunities the internet possessed, and venture capital funds were hoping to fuel that growth with an infusion of money. Unfortunately, many of these investors focused on the revenue potential of these companies, and ignored the fact they were not earning any profits.
When investors realized many of these companies may never produce adequate earnings to satisfy their extreme valuations, the bubble burst and the Nasdaq would fall to 1,114 in October of 2002. It would take another 15 years for the Nasdaq to once again hit 5,000.