There have been recent stories appearing, even in more establishment sources, talking about the AI (Artificial Intelligence) bubble. Many of these companies that are benefitting from AI in the form of higher stock prices are simply doing business with each other.
Let’s say I own a business and you own a business. We make a contract with each other where I sell services to you for $1 million. You will also sell services to me for $1 million. There is nothing illegitimate about these transactions if we are actually providing useful services that are demanded in the marketplace.
But let’s just use an absurd example here and say that I am offering to edit your website articles for $1 million. You only have 50 articles on your website, and this work can be done over a long weekend. Meanwhile, you are going to write 10 articles for me in exchange for $1 million.
Again, there shouldn’t be anything illegal about this contract, and these are legitimate services. But most people realize that it is a bit absurd to charge $1 million for these services. But when we report our revenue next month, it will show $1 million in revenue for each of our companies. Forget the fact that we also had $1 million in expense.
The examples with tech companies investing in AI are not this absurd, but this illustration does show an element of truth in what is happening with AI investment and inflated stock prices.
By the way, even if there is a massive AI bubble and a lot of it is bookkeeping games, it doesn’t mean all AI is not legitimate. It doesn’t mean that AI will be useless. We can already see that it is useful to individuals in gaining information.
There were some crazy companies and valuations in the late 1990s during the tech bubble. The tech bubble burst, and several companies went out of business. But it wasn’t the end of the internet. It was just getting started. The tech bubble bursting wasn’t a lesson that technology companies are bad or worthless. It was a lesson that just throwing money at something because they are supposedly involved in the latest hot thing is not a good long-term investment.
The Nasdaq and Bitcoin
This past week was a rough one for Nasdaq investors and Bitcoin. The Nasdaq gained back a little on Friday, but it was overall a bad week. Meanwhile, Bitcoin fell hard. It is currently under $100,000. It actually dipped below $95,000 on Friday.
The fact that the Nasdaq and Bitcoin are somewhat correlated should really concern Bitcoin investors (speculators). If the Nasdaq falls by 50%, it will probably be a lot worse for Bitcoin. At least Nasdaq companies, even those trading AI investment money, provide some kind of service to consumers. Most of them make some kind of profit.
Bitcoin is still new on the scene. We have seen some big declines in Bitcoin over the years, but we haven’t seen a total crash. I’m not sure if Bitcoin speculators understand that it could easily go below $10,000 in a relatively short period of time.
Circular Investing
When I see these stories about circular investing in AI, it reminds me of Bitcoin.
It sometimes reminds me of the whole stock market when the market is in a bubble frenzy. Are people really getting rich because a company is trading at 50 times earnings? You can get rich if you sell at the top and don’t buy back in, but that means somebody else is losing.
This can even apply to real estate. If I buy a house for $300,000 and then sell it to you for $800,000 a year later, was any value actually created? It is just more money changing hands.
This circular investing is really what defines a bubble. People put money in because they expect to make more money in the future. They expect more people and more money to pile into whatever it is.
When the last sucker forks over a bunch of money for fear of missing out, watch out below. The problem is that we don’t know when this will happen. But if history is any guide, it will eventually happen.