The early 2000s dot-com and fiber-optic crash arose because expectations exceeded monetization, not because the internet was a terrible invention. AI is still at danger today.
The main takeaway was that even if artificial intelligence (AI) is one of the most revolutionary developments of our time, not all businesses that use it will be profitable in the long run.
Expanding on that idea, a more serious worry has recently surfaced: a possible feedback loop that may arise inside the AI ecosystem, akin to the fiber-optic bubble of 2000. The parallels are minor but remarkable, especially in the way that optimism and cash are moving via the same tight network of digital behemoths, giving the appearance of endless expansion.
Comprehending the Feedback Loop
A feedback loop is a process that amplifies development until it gets disconnected from reality, where the system’s output becomes the input for the subsequent cycle. Financially speaking, it happens when businesses, investors, and capital support one another’s forecasts, creating momentum that seems to be advancement but is often only a cyclical confirmation.
The Original Loop: The Fiber-Optic Bubble of 2000
Manufacturers of telecom equipment, such as Nortel Networks and Lucent Technologies, were at the forefront of the internet revolution around the turn of the century. These companies started funding their own clients, or telecom operators, so that those operators could keep purchasing their equipment in response to investors’ demands for unending revenue growth.
The ecology quickly became self-referential. To maintain income streams, equipment sellers were lending to purchasers, investing in them, or even buying capacity back from their own clients.
Everything seemed to be going well on paper: networks were growing, revenues were up, and the future appeared to be bound for expansion. In actuality, the recycling of the same money created the appearance of demand. Everyone was reminded that cash flows, not circular transactions, are what maintain growth when the bubble burst, wiping off billions of dollars in market value.
The Contemporary Echo: The Networked Web of AI
Twenty years later, we are seeing a similar trend with AI, although one that is more advanced. This time, cloud servers, AI technology, and graphics processing units (GPUs) are constructing the loop in place of telecom wires.
Leading cloud providers, AI laboratories, and chip makers are increasingly purchasing one another’s services, investing in one another, and collectively announcing alliances that increase values overall. Feedback Loop in the Current AI World
As long as demand keeps outpacing supply, it is a positive cycle; but, if underlying monetization does not keep up, it might become problematic.
Recent events, such as Open AI’s alliance with AMD, strategic cloud alliances with Microsoft and Oracle, and the significant simultaneous expenditures in AI data centers, have further heightened this cross-holding network. The lack of response from analysts when they asked whether money invested by one AI leader might indirectly finance its rival’s chips demonstrated how complicated money flow has grown.
The Significance of It for Investors
For shareholders, this interaction has thus far produced enormous rewards. Index highs, record-breaking semiconductor sales, and trillion-dollar market valuations have all become commonplace. The values of some of these partnerships reach hundreds of billions of dollars, which boosts mood throughout the world and attracts significant inflows into technology companies and ETFs tied to artificial intelligence.
However, if a large portion of this expansion is due to intra-industry expenditure instead of end-user acceptance, we run the danger of building castles on the same optimistic foundation that collapsed in 2000.
The Last Point to Remember
The early 2000s dot-com and fiber-optic crash arose because expectations exceeded monetization, not because the internet was a terrible invention. AI is still at danger today.
Even while AI is a genuine technology with enormous promise, the increasingly solitary nature of AI investments raises the possibility that we are seeing the beginnings of a feedback cycle, which rewards short-term momentum but may ultimately put long-term fundamentals to the test.
The lesson for investors is still the same: although amazing innovations have the potential to change the world, successful investments need discipline, demand, and steady cash flows.