AI and the dot-com bubble share some similarities but differ where it matters

AI and the dot-com bubble share some similarities but differ where it matters

Artificial intelligence (AI) has experienced tremendous growth in recent years, exploding in popular culture and industry and drawing comparisons to the now infamous dot-com bubble and crash of the 1990s.

During the late 1990s through the early 2000s, Internet-based companies were subject to massive hype and investment, with the industry peaking in value at $2.95 trillion before collapsing to $1.195 trillion as capital dried up and investors fled in droves, causing many companies in the industry to go bankrupt.

According to data from analytics platform Statista, the AI ​​market has experienced steady growth since 2021, with the current market size estimated to be around $200 billion and projected to reach $1.8 trillion by 2030.

The market capitalization of AI has experienced steady growth since 2021, with forecasts predicting it could reach $1.8 trillion by 2030. Source: Statista

Speaking to Cointelegraph, Henry Nothhaft Jr., who has worked in the AI ​​industry since 2009 in various roles and founded Trapit, the first AI software company, said the rapid expansion of AI and the dot-com bubble share some key attributes.

Nothhaft stressed the extent of the impact on the economy and society in both cases. AI, in particular, has been a polarizing topic, prompting tech leaders like Elon Musk to warn of impending doom as they also invest in the sector.

Related: AI-Related Cryptocurrency Returns Increase Up To 41% After ChatGPT Launch: Study

Both represent a transformative technological innovation that redefines industries and changes societal behaviors, he said.

As with the dot-com bubble, with AI, we’re experiencing a hype cycle characterized by rapid innovation, a frothy investment environment, lots of new entrants and, I think, inflated expectations, Nothhaft added.

AI still in its infancy

While Nothhaft thinks it’s too early to make an appeal about how inflated expectations are for AI, he believes most AI companies created during this hype will fail, and a small number of winners will shape the future of the industry.

OpenAI’s ChatGPT chatbot was launched in November 2022 and quickly became one of the fastest growing web platforms in history, eclipsing 1 million daily users in just five days and reaching 100 million monthly users by January 2023.

However, it has recently seen a decline in traffic and rivals such as Google’s Bard, Microsoft’s Bing and Character.ai have so far failed to achieve the same levels of success.

Preliminary data on the traffic performance of ChatGPT compared to Bing, Character.ai and Bard. Source: similar web

According to Nothhaft, however, AI will not experience a crash of the same magnitude as the dot-com bubble. Unlike the early years of the internet, which he says were more about exploration and novelty than utility, AI has already seen applications in various industries, including media, healthcare, finance, transportation and education.

While AI is only in its infancy, these applications of AI are not future projections, they are here and now. AI is delivering tangible value today,” Nothhaft said.

It will soon be difficult to distinguish between the AI ​​industry and the broader software industry, as AI will become a ubiquitous part of the digital landscape, he added.

AI and crypto

The rise of AI has also drawn parallels to cryptocurrencies, which have had their meteoric rise over the last decade, surpassing a total market capitalization of $3 trillion at its peak in November 2021 before losing more than half its value in 2022.

The market capitalization of cryptocurrencies reached an all-time high in 2021 before returning to the ground. Source: CoinGecko

Initial Coin Offerings (ICOs) gained tremendous popularity as a fundraising technique for blockchain ventures between 2016 and 2017. A key benefit was that entrepreneurs could receive funds directly from the crypto community.

Non-fungible tokens (NFTs) have also experienced a huge boom period, but Nothhaft said NFTs and ICOs couldn’t be more different than AI.

Related: Cryptocurrencies are just like they were in the late 1990s with the internet bubble, says Hodl CEO Maurice Mureau

According to Nothhaft, NFTs and ICOs represent niche applications of blockchain technology, while artificial intelligence represents a substantial technological innovation with wide-ranging tangible applications.

Unlike the crypto space, where hype has often outpaced reality, the promise of AI rests on substantial technological advances and nearly limitless applications, he said.

The growth of AI may seem rapid, but it’s not a bubble in the way we’ve seen with some cryptographic phenomena.

Sam Huber, CEO of metaverse platform LandVault, shared another perspective with Cointelegraph. He believes NFTs and ICOs share some similarities with the AI ​​market, particularly in terms of initial hype, rapid growth and subsequent potential for market corrections, but differ in the factors driving growth.

Related: SVB collapse cooled trading volumes at NFT: DappRadar

According to Huber, the growth of AIs is driven primarily by technological advances and practical applications, while cryptocurrencies and related assets, such as NFTs and ICOs, often attract speculative investments motivated by the prospect of rapid financial gains.

AI is a broad field encompassing various technologies and applications, while cryptocurrencies like Bitcoin and Ethereum are specific digital assets, he said.

The value proposition of AI is its ability to improve and transform multiple industries, while cryptocurrencies primarily serve as decentralized digital currencies or investment assets, Huber added.

Differences from the dot-com bubble

Huber said the rapid growth of artificial intelligence and the dot-com bubble share some parallels, notably that in both cases not every company or investment opportunity in the space has a viable business model.

Many companies used to call themselves Internet businesses simply by having a website. It’s similar to many companies today who call themselves AI companies because they connect to ChatGPT, he said.

These companies attract speculative investment but are not building meaningful differentiation or a defensible technology. When these companies fail to deliver or raise their next round, it can cause a market crash.

However, Huber says it’s a very different environment than it was in the 1990s, when dot-com companies went public much earlier and, once on the market, retail investors could invest in them.

Related: Experiments show that AI could help control smart contracts, but not yet

Companies today are able to raise much more capital privately, so there’s no need to list them, Huber said.

If they fail, the impact on the market is much less because they only have institutional investors in their capitalization tables, so the general public is protected and mass panic is avoided, he added.

Overall, Huber argues that one of the main differences between other tech bubbles and AI is that it is supported by tangible applications and use cases, with many companies incorporating AI into their operations and products.

The cryptocurrency industry is ripe with AI projects and the music and film industries have also started experimenting with it.

This key distinction implies that the progress of AI is being driven by practical utility rather than speculation alone, Huber said.

AI on a different path than the dot-com bubble

Osman Masud, CEO of independent game developer The Game Company, which uses artificial intelligence in its products, told Cointelegraph that unlikely AI will follow the same path as the dot-com bubble.

The dot-com bubble was driven by speculation in Internet companies. AI technologies have already demonstrated their practical use in industries like healthcare, finance and automation, he said she.

While the AI ​​and dot-com bubble have been booming rapidly, the difference lies in the level of maturity and the tangible value it generates, Masud added.

Related: Apple has its own GPT AI system but has no stated plans for public release: report

Overall, Masud believes the growth of AI is driven by advances in machine learning, deep learning, and neural networks, which continue to evolve and improve.

With the potential to transform industries and improve efficiencies, he said the AI ​​sector should continue to experience significant growth for years to come rather than collapse.

While there may be market fluctuations and corrections, the long-term impact and potential of AI should be substantial due to its wide-ranging applications and transformative capabilities, Masud said.