AI bubble? Bitcoin's high correlation to Nvidia sparks 80% crash warning
News Summary
Bitcoin's (BTC) 52-week correlation with Nvidia (NVDA) stock has surged to 0.75, marking its highest point in a year. This synchronized rally has sparked concerns among market watchers about a potential "double bubble," drawing parallels to the dot-com era of the late 1990s. Analysts fear that such a high correlation could lead to an 80% drop in BTC price. Both Nvidia's share price and Bitcoin's valuation have hit new record levels, with Nvidia up 43.6% year-to-date and Bitcoin gaining 35.25%. Market commentators suggest that the AI-crypto rally could represent a "double bubble." The article highlights a complex investment loop among AI companies, where entities like OpenAI, AMD, Oracle, Nvidia, and CoreWeave are mutually funding and transacting with each other, which analysts deem a "massive red flag." This pattern is likened to Cisco's role in the dot-com bubble, where it funded gear purchases that effectively fueled demand for its own networking infrastructure. Trader Adam Khoo warns that an eventual burst of the AI/Crypto bubble could see overvalued and unprofitable names in these sectors drop 50% to 80%, citing Warren Buffett's strategy of holding significant cash and avoiding tech stocks before the 2000 tech crash.
Background
The current market is experiencing an explosive growth in Artificial Intelligence (AI) technology, with chipmakers like Nvidia being key beneficiaries, pushing their stock prices to new all-time highs throughout 2024 and 2025. Concurrently, the cryptocurrency market, particularly Bitcoin, has seen significant rallies in 2024 and 2025 after a bear market in 2022-2023. This article draws parallels between the current AI and cryptocurrency fervor and the dot-com bubble of the late 1990s. During the dot-com era, technology stock valuations reached extreme levels, eventually bursting between 2000 and 2002, leading to an approximately 80% crash in the Nasdaq Composite. Many companies, especially those with unclear business models or lack of profitability, did not survive. Warren Buffett famously navigated this period by sticking to profitable, traditional companies and avoiding tech stocks. In 2025, under the Donald J. Trump administration, U.S. economic policies are likely to focus on stimulating growth and deregulation, which could further fuel risk appetite in the markets, potentially supporting valuations of high-risk assets but also exacerbating the risk of bubble formation.
In-Depth AI Insights
What are the systemic risks implied by the "AI-on-AI" funding loop, and how might it differ from or echo the excesses of the dot-com bubble? - This loop highlights the risk of valuations becoming detached from fundamentals. When AI giants invest in each other, forming a closed financial ecosystem, capital flows are driven not by independent market assessment but by a shared narrative and valuation support. This creates a self-reinforcing mechanism that can lead to over-inflation. - Similar to Cisco's strategy during the dot-com bubble of funding customers to buy its own products, this "AI-on-AI" loop essentially creates demand and sustains valuations through internal transactions. However, current AI technology is more disruptive, and its potential long-term value might be used to rationalize current high valuations, making the bubble harder to identify. - The real risk lies in the fact that this internal loop cannot be sustained once external capital inflows slow down or market sentiment reverses, potentially leading to rapid valuation corrections, especially if AI applications haven't fully translated into widespread profitability. If Bitcoin is increasingly seen as a "high-beta tech asset," what does this imply for its diversification potential and its sensitivity to broader tech market corrections? - The narrative of Bitcoin as "digital gold" or a safe-haven asset is being undermined. If it is highly correlated with high-growth tech stocks like Nvidia, Bitcoin is unlikely to provide portfolio hedging during a tech sell-off and will likely decline in tandem. - This correlation suggests that institutional and retail investors may be treating Bitcoin as a high-risk, high-reward growth asset, rather than an alternative asset independent of traditional financial markets. This means Bitcoin's volatility will be more influenced by macroeconomic trends and tech stock sentiment, rather than solely its own supply-demand dynamics or crypto-specific events. - For investors seeking risk diversification, including Bitcoin in a portfolio may no longer offer the expected benefits of diversification and could instead increase exposure to systemic risks within the tech sector. How should investors interpret current Trump administration economic policies in the context of this "double bubble" warning and Warren Buffett's cautious strategy? - The Trump administration's policies typically lean towards deregulation and stimulating economic growth, which can inject optimism into the markets in the short term and potentially inadvertently fuel bubbles in high-risk assets. Low interest rates and expansive fiscal policies can lead to capital flowing into growth-oriented and speculative assets, further inflating valuations. - However, Buffett's strategy – holding substantial cash and avoiding overvalued assets during market exuberance – implies an adherence to long-term value and fundamentals. This contrasts with the short-term market performance that a Trump administration might pursue. - Investors need to recognize that short-term stimulus from political cycles may not offset the long-term risks of deteriorating fundamentals or a bubble burst. At a time of global economic uncertainty, Buffett's cautious approach might signal an expectation of future market corrections, prompting investors to re-evaluate their risk exposure and asset allocation, especially if the U.S. economy becomes overheated due to stimulus measures.