By the end of 2022, the surge in artificial intelligence (AI) propelled the rapid growth of tech companies, marking a significant moment with Nvidia reaching a valuation of five trillion dollars. However, where there is excitement, there is often a bubble, and following the peak, the bubble may deflate. This deflation can be linked to the stagnant rise of cryptocurrencies.
Profitability Issues in AI Companies
In recent weeks, discussions about the inflated valuations of AI companies have significantly increased. While large tech firms remain profitable, the sustainability of this profitability is questionable.
AI-associated companies like Nvidia, Alphabet, Amazon, and Microsoft have reported positive earnings in their latest reports. The funds are mostly invested in new data centers, driven both by Trump’s mandates and the necessity for AI infrastructure development.
Currently, OpenAI and Anthropic stand as the brains behind AI in the U.S. While ChatGPT and Claude are extensively used worldwide, their earnings remain relatively weak. Publicly traded companies exhibit good earnings reports by selling AI-driven services, directing generated funds into infrastructural investment.
The financial cycle depends on AI companies receiving continuous investment from and selling products to big tech companies, and selling chips and cloud services to those AI firms in return. However, two issues arise: producing successful products to cover substantial R&D and IT costs, and securing immense investments to counterbalance these expenses. Alone, OpenAI’s losses exceed $160 billion.
Moreover, AI robots continue to harbor critical flaws, with logical errors and hallucinations raising concerns about further investments. Although a product exists, it is not fully operational, producing inaccuracies even in its latest versions, feeding concerns about the future.
In an optimistic scenario, OpenAI might become profitable by 2030, with Anthropic aiming for 2028. Microsoft faced over $12 billion in losses from OpenAI in the year’s first quarter. The continuous high expenditure, ranging from hefty engineer salaries to Nvidia chips, highlights the challenges a deficit company might face in sustaining its operations longer without balancing its financials.
Impact on Cryptocurrencies
Recently, Sam Altman, OpenAI’s CEO, and its finance director suggested that the government should provide credit guarantees, particularly for data center investments. While such demands stem from the corporation’s challenging situation, Altman emphasized that strategic infrastructure could warrant public-private partnerships to secure public sector support.
Under current conditions, the substantial losses of OpenAI could greatly impact trillion-dollar giants. While the feasibility of its 2030 target raises doubts, lacking governmental backing makes headlines like “AI Bubble Bursts” unsurprising.
This scenario inevitably affects risky markets, encompassing cryptocurrencies which fall under this category. Potential recessions, postponed interest cuts, and diminishing risk appetite might drive investors towards lesser-risk assets, undermining the AI build-out fueled markets.
If this trend intensifies, stock markets and cryptocurrencies could witness sharper declines. During this period, OpenAI might adopt measures to produce healthier products, enhancing revenues and rendering this build-out process more sustainable.
