The Artificial Intelligence (AI) discussion is reminiscent of the Dot-com era of the late 1990s. Although the primary technology of AI, much like the internet itself is not a bubble, the overuse of finances and the high valuations of the existing wave is a tangible and an obvious threat to market stability. We are now in the midst of an emerging bubble. The argument of the whole article is that an unsustainable complex of self-regulating financial processes, a blistering market, and an unexpected inability to quantify enterprise returns are all paving the way to the biggest market correction in history.

The Current Landscape

Artificial Intelligence can be traced to the 1970s and 1980s, when the modern computer era had not begun. Nonetheless, the present financial bubble was initiated by OpenAI, which made AI technology accessible to everyone turning it into a household utility, just like the use of Mosaic.com in 1993 that led to the Dot-com boom.

The post-AI trigger period has featured chilling similarities with the Dot-com period of 19931999. We are experiencing insane valuations in which the companies are gaining huge market coverage, which is not necessarily based on due diligence or proven profitability. Behavior has been turned riskless and carefree that it has brought about excessive dependence on technology without much consideration on the business models behind it. The fundamental weakness of the Dot-com boom of putting billions of dollars into businesses that are not viable or scalable is being reenacted in the AI industry today.

Worsening this issue, research indicates that the hyper-adoption of generative AI is not being converted to actual corporate value. However, even though enterprises have invested an estimated 30 to 40 billion in generative AI, 95 percent of the organizations are achieving zero returns. The overwhelming number of pilot programs remain in the process of doing nothing significant, which points to the conclusion that most of the businesses that are hiding themselves behind the banner of AI technology are incapable of generating sustainable value on behalf of their companies.

Example– In a recent case of the dangers of unregulated AI application, Deloitte accepted to repay part of the amount paid to the Australian government as a result of its $440,000 report to the Department of Employment and Workplace Relations became public and was discovered to contain several mistakes and fake sources. The company subsequently acknowledged that it employed generative AI (Azure OpenAI GPT-4o) in the creation of sections of the report. There was no evidence that the errors influenced the findings and recommendations of the report by Deloitte, yet critics such as Labor senator Deborah O’Neill pointed out that the case highlighted a human intelligence issue within consulting firms and cast its transparency and accountability into question when working with AI support.

Infinite Money Glitch: Circular Financing and Inflated Transactions

The most serious process that contributes to the present valuation boom is a system of mutual investments and expenditure commitments, which may be called the Infinite Money Glitch. The structure gives large industry participants an opportunity to inflate their revenue projections and share prices between themselves via the circular transactions.

An example is where a chip/resource supplier such as Nvidia invests in a model builder such as OpenAI. The capital is then utilized to grow OpenAI and then orders huge hardware with the investor, Nvidia. In response to such news of a huge order, the market ruthlessly buys the stock of such an investor. This set up forms a vicious cycle of finance and obligation. The scale of the conduct is astounding: OpenAI, whose valuation of up to very large numbers is based on the order of $12 billion of revenues, already has very large deals on the exchange of hardware and technologies with Nvidia.

This is not an isolated trend, but a systemic trend among market leaders:

• Amazon and Google have invested in Anthropic that in turn makes use of their own server and cloud infrastructure.
• Microsoft invested in OpenAI that pledged to use Microsoft Azure with the allocation of 10 billion dollars.

These contracts, which are signed among mutually funded entities, pump perceived demand and fosters a sense of long-term growth which in effect translates to these players playing bubble bubble with each other.

The Commoditization Risk and the Valuation Disruption

The second significant warning sign is the changing valuation of infrastructure providers that is exemplified by the case of Nvidia analyzed by Professor Damodaran. Nvidia got its leadership position in the market due to innovation, where it grabbed the first chance in crypto, gaming and currently in AI/autofile chips. The competitive forces in the market are however changing at speed.

The introduction of disruptors, e.g., DeepSeek, showed that it was possible to develop almost similar systems with as little as 1/10 th or 1/20 th the computing power that the current large models needed. This advancement in technology has divided the AI market into two different levels: commoditized market and premium market.

Although Nvidia stands to take up the high-end chip market, the margins of the company are significantly impacted by this disruption. The astronomically large operating margins (approximately 71%), are expected to shrink down to 60% in the long run in response to pushback on major chip makers (such as TSMC) and large clients. Secondly, the leadership requires high, constant capital investment and research and development focus which need to be maintained on a level that exceeds the average within the industry thus the constant burden on reinvestment. The main weakness lies in the fact that the demand of AI resources, as massive as it is at present, can simply not maintain the same level, provided that the efficiency improvement persists and products become commoditized.

The Road Ahead & Strategic Implications

It is not whether the bubble is going to burst, the more important issue to investors is what will happen when the circular deals fail and the low enterprise ROI becomes irrefutable.

Unmitigated Market Disaster

The threat of the collapse is devastating. Once the market clears, the market will not have to fall slowly, the market will plummet down in a massive, sharp downward spiral in the snowball effect, where selling off masses will increase losses. Any breakdown in the valuation of Nvidia caused by failure to fulfill growth pledges or immediate demand changes would cause a disastrous devaluation of the index.

Commoditization Risk management

Most AI applications, particularly the ones that are based on large language models (LLMs), are becoming commoditized products. The source material observes how fast products such as Midjourney are being displaced by the competitors such as Gemini. The loyalty of consumers and enterprises is based on the quality of the product, but not the platform that is behind it; individuals will switch immediately to the most appropriate, and the cheapest one. This is a weakness in the USP that cannot be defended, enhancing the likelihood of failure of many AI-wrapped businesses.

Ending Note

The present-day AI hype is maintained by the combination of an elixir of historical optimism and advanced, circular financial engineering. The narrative of AI is already selling at a much higher price than the actual value, which Professor Damodaran has long defined. With technology being transformative, the financial bubble substantiating it is premised on unsustainable models of valuation, high-speed commoditization, and systemic risk. To the institutional investors, the red flags, including Infinite Money Glitch and 95 percent zero-return rate in businesses are too deafening.

The market should realize that when the demand curve starts moving and the music comes to a halt, the crash will not be slow but rather fast, bringing out a terrifying balance score on the people who ignored the basic principles of make-do and growth. It would be prudent to recognize the bubble at this point, before the bubble can pop and 8 percent of the S&P 500 can be transformed into systemic carnage.