The "It's a tech bubble!" crowd has grown increasingly hysterical in recent months. Over the past five years Hacker News and Twitter have been warning us (almost weekly) of the impending tech bubble:
Is Facebook a Bubble? (2011)Is it a New Tech Bubble, Lets See if it Pops (2011)Instagram and Facebook: The Next Tech Bubble? (2012)Evidence that the Tech Sector is in a New Bubble (2013)Who will be Hurt Most When the Tech Bubble Bursts? (2015)How the Fed Tried to Fix the Recession and Created the Tech Bubble (2015)etc. etc. etc.
Mark Cuban added to the hysteria when he published Why This Tech Bubble is Worse Than the Tech Bubble of 2000.
Jeez, that sounds bad. Like really, really bad. Like too bad to be true bad.
As we explore Marks claims, well (very generously) accept:
On Angel investors Mark says:
According to some data I found, there are 225k Angels in the US. Like the crazy days of the internet boom, I wonder how many realize what they have gotten into?
He goes on to say that most of them will fail and that the lack of liquidity will hurt:
So why is this bubble far worse than the tech bubble of 2000?
Because the only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity.
If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it?
Basically, when the market shits the bed, you wont be able to sell your stock to anyone. Those 225,000 angel investors will likely lose everything theyve invested.
So lets look at the absolute worst case scenario: Every startup in the US turns out to be complete garbage. All valuations drop to zero tomorrow. Imagine the horror:
So what kinds of numbers are we talking here? According to TechCrunch the unicorns alone would be responsible for a staggering loss of ~$327 billion. Ouch.
But what about our 225,000 angel investors? Well pretend for a moment that every single one of them pumped $1,000,000 into various startups. Their losses would represent $225 billion of real, actual money.
Combine these two numbers and were looking at worst case losses of around $550 billion.
In short: Between 2000 and 2002, the NASDAQ saw $5 trillion wiped out.
oh god pls no... where did ~70% of our tech economygo??
Im not sure if theres much more to say at this point. Weve been extremely generous to Marks point of view, and we can clearly see that the current tech bubble doesnt even come close to touching the DotCom bubble. Its astonishing to me that someone so intimately familiar with the DotCom bubble could so deeply underestimate its impact.
This techie want formally trained in economics or finance. But Ive long had an interest in algorithmic trading and stocks. Ive built programs that traded penny stocks and Bitcoin. Ive designed trading algorithms for TD Bank and Citadel and Ive had a chance to speak with smart people whove been through bubbles and recessions.
One conclusion Ive come to on bubbles:
A bubble should scare you when your grandmothers pension is put directly at risk.
Once dumb money is able to participate in a bubble, it can inflate to the point where it puts the economy as a whole at risk. Until then, its impacts are limited to the small set of specialized investors who have access to that market.
The bitcoin bubble of 2013/2014 had no lasting effects on the economy, because there was no (or very little) dumb money.
In 2008, your grandmas pension fund was buying up CDOs or funding a hedgefund that would trade them on her behalf. Time to be scared.
In 2000, your grandmas pension fund was buying every stock that IPOed. Hell, your grandma might have even opened up a day-trading account.
The point here is that it takes a lot of money to make a burst bubble transition from Bad for immediate investors to Bad for the whole economy. Facebook buying WhatsApp for $16 billion does not mean that were about to see a recession. And Mark Cuban getting squeezed by competing angels does not mean that this tech bubble is worse than 2000.