The AI Boom Could End Worse Than the Dot-Com Crash

Chethana Janith, Jadetimes Staff

C. Janith is a Jadetimes news reporter and sub-editor covering science and geopolitics.

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The parallels between the AI bubble and past financial crises are too numerous to ignore. We have excessive valuations disconnected from profits. We have circular financing, creating an illusion of growth. We have massive spending based on optimistic future projections.

Image Source: (BlackJack3D/iStock via Getty Images)

Call it what you want - the contemporary AI frantic boom, bloating bubble, or impending bust - it is the topic of the hour for all investors and tech enthusiasts. A lot of experts and laymen followers of the AI frenzy are troubled by the eerie similarity with the two most recent financial crises, the dotcom bubble, which burst in March 2000, and the subprime mortgage crisis, the infamous bubble that burst in 2008.

Understanding these striking similarities, beyond the denial of the pro-frenzy voices, is necessary, not only for experts, financiers, investors, or stakeholders, but also for everybody who is going to be affected by the rupture of such a gigantic bubble currently expanding.

"Today, in the AI frenzy, tech giants are making humongous financial commitments to each other, and the bet is similar: tomorrow’s revenue will justify today’s spending, and everything will work out fine!"

When Optimism Blinds Reality

Think back to the late 1990s when companies simply adding “.com” to their names saw their stock prices skyrocket. Investors were convinced that traditional business metrics like actually making a profit no longer mattered. The “new economy” would change everything, they said. Pets.com is an example of a company that never turned an iota of profit, yet it raised hundreds of millions of dollars, only to collapse spectacularly when the hype met reality.

And now, it seems that not only is history repeating itself, it seems it’s doing so with an AI quantum-speed twist.

AI companies are extremely overvalued, with the S&P 500 trading at 23 times forward earnings and share valuations reportedly the most stretched since the dot-com bubble. Companies are receiving billion-dollar valuations not because they’re profitable, but because they promise to be transformative. The problem? We’ve heard this song before, and it doesn’t end well.

Even Jamie Dimon, head of JP Morgan, the largest bank in the US, warned that an AI-driven stock crash could result in a lot of invested money being lost, though he acknowledged that AI would eventually pay off “just like cars in total paid off, and TVs in total paid off, but most people involved in them didn’t do well.”

This candid assessment captures the essence of bubble psychology: the technology may be real and transformative, but that doesn’t mean today’s investors will profit from it.

The Circular Money Machine

The most daunting resemblance to past bubbles is what analysts are increasingly terming “circular financing.” Where money is galloped around among a handful of companies, in a financial carousel that creates the optical illusion of economic growth.

This is what’s happening in AI today. Nvidia has invested $100 billion into OpenAI to help fund its massive data centre buildout, while OpenAI has committed to purchasing millions of Nvidia chips for those facilities, meaning Nvidia is essentially bankrolling its own future sales.

Meanwhile, OpenAI confirmed a $300 billion deal with Oracle to purchase cloud computing capacity, and to fulfill OpenAI’s compute demand, Oracle must spend heavily on hardware, primarily buying Nvidia’s chips.

The web becomes even more tangled when you consider that Microsoft has invested heavily in OpenAI while also being a major customer of companies like CoreWeave, where Nvidia also holds a significant equity stake. As one analyst put it, “It is getting hard to keep track of the financial interests here… I fear that it’s no longer circular but a tangled web.”

This should be a wake-up call for all who witnessed the lead-up to the financial crisis in 2008. As the banks knowingly created financial products out of hazardous mortgages, they only sold them to other institutions that were either oblivious about the risks or knowingly took them on out of greed.

All that hoopla did not negate the main question back then, “Who’s going to pay back these mortgages?” and the eventual answer was the collapse of the entire system.

Spending Money That Doesn’t Exist

The scale of investment in AI is staggering. OpenAI is committed to investing $300 billion in computing power with Oracle over the next five years, averaging $60 billion per year, while the company is losing billions of dollars annually, and projected revenues are expected to reach only $13 billion in 2025.

To put it in simple terms, OpenAI has just dedicated 5x its current annual revenue to pay one supplier: “Nvidia”. While it’s not only burning through its cash, it’s not forecasting any profit before the end of the decade!

The math simply doesn’t add up without assuming massive future growth that may or may not materialize.

Making enormous obligations based only on optimistic projections, if this sounds familiar, it’s because during the housing frenzy, lending institutions kept on giving mortgages to those who couldn’t possibly afford them through passive underwriting, and the bet was that everything would work out when the home prices went up.

Today, in the AI frenzy, tech giants are making humongous financial commitments to each other, and the bet is similar: tomorrow’s revenue will justify today’s spending, and everything will work out fine!

If those revenues don’t materialize, and ff the findings of the 2025 MIT study, which revealed that a staggering 95% of organizations deploying generative AI are currently seeing little to no return on investment, turn out to be accurate, then the consequences could be unavoidably severe.

When Everyone Bets on the Same Horse

There’s another troubling parallel to 2008: concentration risk. Back then, financial institutions across the globe had enormous exposure to the same asset: “U.S. housing.” When housing prices fell, it triggered a global financial crisis because everyone was vulnerable to the same problem.

Today, the “Magnificent Seven” (Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta, and Tesla), account for approximately 35% of the S&P 500’s total value, meaning investing in the S&P 500 no longer provides the diversification that passive investors expect.

These aren’t just big companies; they’re all heavily interconnected through AI investments and partnerships. If the AI boom falters, the damage won’t be limited to a few tech startups; it could ripple through the entire market.

Real Technology, Cheap Risk

One of the most dangerous conditions preceding both the dotcom crash and the 2008 crisis was that the risk appeared to be very cheap. In simple terms, borrowing money was easy, and investors weren’t demanding much compensation for taking risks. This encouraged excessive risk-taking because the consequences seemed distant and unlikely.

We’re seeing the same pattern today.

Rajiv Jain, chair and chief investment officer at GQG Partners, came early to the view that today’s stock market is “much worse” than the dot-com bubble, warning that “one of the lessons of navigating these kinds of bubbles is you’re either early or late. If you’re late, the losses are horrendous.” His fund managers have positioned their investments for an AI correction, despite acknowledging this stance has “already cost us performance in the short run.”

But being right about a bubble doesn’t make you immune to its effects if you act too early or too late. Didn’t some “experts” diagnose the 2008 financial crisis since 2005? Didn’t the dotcom frenzy start in 1996, only to burst in 2000?

What’s Different This Time, and Maybe Worse?

The AI boom carries the same warning signs as previous bubbles, sure. But here’s where it gets interesting and more dangerous.

Remember the dotcom era? Back then, it was mostly venture capitalists and retail investors throwing money at anything with “.com” in the name. Day traders were speculating on stocks they barely understood.

Today? We’re watching some of the world’s most sophisticated corporations, companies that supposedly know better, placing trillion-dollar bets on AI. These aren’t amateur investors gambling their savings. These are Microsoft, Google, Oracle, and Nvidia.

When these tech giants are eventually forced to write down billions in failed AI investments, and history suggests they will, the ripple effects won’t stop at Silicon Valley’s borders. Job creation stalls. Innovation budgets shrink. Economic growth takes a hit.

And then there’s the circular financing web we discussed earlier. Picture this scenario: OpenAI misses its revenue projections. Oracle, having committed to massive infrastructure spending based on OpenAI’s growth trajectory, suddenly can’t justify purchasing all those Nvidia chips. Nvidia’s stock price tumbles. Every company that invested in Nvidia watches its portfolio bleed red.

It’s like an algorithmic chain reaction, waiting to happen.

Learning From History, Or Repeating It?

The parallels between the AI bubble and past financial crises are too numerous to ignore. We have excessive valuations disconnected from profits. We have circular financing, creating an illusion of growth. We have massive spending based on optimistic future projections.

Furthermore, we have a dangerous concentration of risk. And we have investors convinced that “this time is different.”

Artificial intelligence is a real technological advancement, just as the internet was real in the 1990s and homeownership was beneficial in the 2000s. The problem isn’t the technology itself; it’s the financial excess built around it.

Multiple expert analysts see an imminent bubble situation building up, while Nvidia’s CEO keeps on saying, “We see something very different,” at least in public. But I’ll leave you with what the man of the hour said to his employees in a recent leaked meeting:

“If we delivered a bad quarter, it is evidence there’s an AI bubble. If we delivered a great quarter, we are fuelling the AI bubble.”

“If we were off by just a hair, if it looked even a little bit creaky, the whole world would’ve fallen apart.”!