Bitcoin Bulls Face AI Bubble Risks as Concerns Grow at $90,000

Bitcoin's increasing link to artificial intelligence (AI) stocks makes it vulnerable to potential corrections in the AI market, according to analysts. While this connection poses risks of short-term losses, a forthcoming easing of financial conditions could boost Bitcoin's performance as liquidity flows back into the market.

Key Takeaways

Bitcoin's rising correlation with AI stocks may expose it to risks associated with an AI bubble correction.
Analyst reports indicate that major tech companies, including Oracle, are under pressure, impacting Bitcoin's price.
A potential correction in the AI sector could lead to selling pressure on Bitcoin, but increased liquidity from central banks may support a rebound.
Historical data suggests that Bitcoin could thrive in a recovered liquidity environment, following corrections in the AI market.

Bitcoin’s mounting exposure to an AI bubble unwind

Bitcoin and AI: A Growing Connection

Recent trends have shown that Bitcoin is becoming increasingly correlated with stocks tied to the AI sector, heightening its vulnerability. For instance, Oracle Corp's stock dropped significantly on December 11 after reporting disappointing revenues and revealing higher capital expenditures related to AI, financed partially through increased debt. This downturn affected shares of other tech giants like Nvidia Corp and Advanced Micro Devices Inc, reflecting investor concerns about a possible “AI bubble.”

On that same day, Bitcoin also experienced a decline. Analysts attributed this to a reduced appetite for risk, primarily driven by challenges in the AI sector. Over a three-month period leading to Nvidia’s earnings report in November, Bitcoin's correlation with the company's stock reached notable levels. Additionally, indices tracking the Nasdaq also demonstrated a strong positive correlation as of December 10.

Since mid-September, when the Federal Reserve initiated interest rate cuts, Bitcoin's value has decreased, while the Nasdaq index has seen an uptick. Reports indicate that valuations tied to AI and various macroeconomic indicators have pushed broader U.S. equity valuations beyond those observed during the dot-com bubble. Major technology firms have raised considerable capital through bond issuances to expand their hardware and data center capabilities.

According to Moody's chief economist, borrowing related to AI now surpasses the debt levels witnessed in the tech sector before the dot-com crash. Many analysts have warned of a substantial funding gap for AI infrastructure, as the expenditures are currently outpacing revenues at numerous companies.

The Bank of England’s latest financial stability report specifically pointed out the stretched valuations in AI-oriented companies and cautioned that any sharp downturn in AI-related equities could negatively affect the wider markets, especially through leveraged investors and private credit risks. Similarly, the European Central Bank reinforced this sentiment in its Financial Stability Review.

Estimates indicate a notable year-over-year surge in financing deals for AI infrastructure through bonds and private credit. Some analysts have even drawn parallels between current market conditions and those leading up to the 2008 financial crisis, highlighting concerning levels of opacity and financial structure.

Oracle’s investments in AI data centers, coupled with increased long-term debts and rising credit-default-swap spreads, resemble the risk profiles that regulators have warned about, according to financial experts.

Research has shown a strong positive relationship between Bitcoin prices and overall global liquidity. Bitcoin has often been viewed as a "liquidity barometer," performing well when liquidity is plentiful but poorly during contractions. Analysts warn that if AI-related credit markets come under severe stress, Bitcoin could see initial selling pressure, prompting macro and growth-focused funds to pull back.

However, such a scenario might also lead to financial institutions easing their monetary policies in response to market conditions.

The International Monetary Fund’s Global Financial Stability Report expressed concern over the high concentration of AI-driven equities and stretched asset valuations, indicating an increased risk of a chaotic market correction. The report highlighted the necessity for agile monetary policies to mitigate such shocks.

Following the market shock from COVID-19 in March 2020, central banks actively provided liquidity and engaged in quantitative easing, which coincided with a significant uptick in the total cryptocurrency market value over subsequent years. Historical data illustrates that events of monetary easing and a weaker dollar have preceded major rallies in Bitcoin prices.

Recently, market conditions have seen liquidity gravitating back towards Bitcoin rather than alternative cryptocurrencies, effectively increasing Bitcoin’s market dominance amidst thinning liquidity and heightened volatility. Exchange-traded funds (ETFs) have emerged as popular avenues for institutional investors seeking Bitcoin exposure.

Market analysts contend that Bitcoin's immediate challenge lies in its tight coupling with the performance of AI stocks. In the short term, Bitcoin may face downward pressure should an AI sector adjustment occur. However, if central banks react by easing monetary conditions, Bitcoin historically tends to capitalize on renewed liquidity inflows into riskier assets in the months that follow. The evidence from Oracle's earnings report on December 11 illustrates this point, as Bitcoin's decline mirrored a substantial loss in Oracle's market capitalization during the same trading session.