The conversation around the AI bubble often falls into a predictable trap: is it real technology or an overblown speculation? This binary thinking misses the point entirely. To truly understand the current landscape of artificial intelligence, from groundbreaking innovations to the influx of capital chasing the next big thing, we need to move beyond simple yes-or-no answers. The current AI wave is not just one or the other; it is both a profound technological shift and a magnet for speculative behaviour, existing in an intricate, often uncomfortable, partnership.
This dual nature is not unique to AI. History shows that every significant technological revolution, particularly those promising rapid wealth creation, inevitably attracts a host of speculators. Think of the gold rush, the railway boom, or the early days of the internet. These periods were characterised by genuine innovation alongside rampant opportunism. It is a dance between legitimate progress and the inevitable froth that accompanies it, a dynamic we are seeing play out yet again with AI.
The Inseparable Pair: Innovation and Speculation
Carla Perez, in her seminal work “Technological Revolutions and Financial Capital,” outlines this historical pattern. She argues that true technological waves, those with the power to fundamentally reshape industries and create new wealth, inherently invite speculative behaviour. This is not a flaw in the technology itself, but a predictable human response to perceived opportunity. When a new frontier opens up, promising unprecedented returns, it is only natural for a flood of participants to rush in.
This means that if AI is indeed a real, transformative technology, then bubble-like behaviour is not a sign of its impending doom, but rather an expected companion. The two are not mutually exclusive; they are a pair. The very excitement and potential that drive legitimate innovation also fuel the speculative frenzy. This perspective reframes the entire discussion, moving us away from a reductive debate and towards a more nuanced understanding of the forces at play.
Industrial Bubbles Versus Financial Bubbles
Amazon founder Jeff Bezos drew a critical distinction between “financial bubbles” and “industrial bubbles.” He cited the 2008 financial crisis as an example of a destructive financial bubble, built on unsustainable practices with little underlying value. In contrast, he views the dot-com era of the late 1990s as an “industrial bubble.” While that period saw significant overvaluation and many companies failed, it also laid the groundwork for an immense amount of durable technology and fostered new generations of entrepreneurs, ultimately driving significant economic growth. Bezos believes AI falls squarely into this “industrial bubble” category.
This distinction is crucial for investors and professionals. An industrial bubble, while volatile, can still yield immense long-term value, creating foundational technologies and entirely new industries. A purely financial bubble, however, often leaves little behind but wreckage. Understanding which type of “bubble” we are navigating informs investment strategies and career planning.
Navigating the Current AI Investment Landscape
The sheer volume of capital flowing into AI, particularly in the private markets, highlights this dual dynamic. While genuine advancements are being made, there is also evidence of speculative practices, even among major players. The rise of “circular deals,” in which large tech companies invest in startups that subsequently commit to purchasing services from the investor, raises questions about the true nature of these transactions.
- Circular Deals: These arrangements, like Microsoft’s investment in OpenAI, followed by OpenAI’s commitment to use Microsoft’s cloud services, can inflate perceived value. While presented as strategic partnerships, they can also be seen as a way to inject capital and secure future revenue streams without the typical market forces at play. As one observer noted, if a company is given money to spend on services it might not otherwise have bought, it complicates clear accounting and valuation.
- Risk Appetite: Even large, sophisticated companies can exhibit speculative behaviour. When in a “hot streak,” the risk appetite tends to increase. This can lead to agreements that, under normal circumstances, might be subject to greater scrutiny. The “it’s not material” defence for questionable deals often prompts the counter-question: then why do it at all?
For retail investors, the current environment presents particular challenges. The allure of outsized returns from early AI investments is strong, but the mechanisms for accessing these opportunities are often opaque and laden with risk.
The Perils of Private Market Access for Retail Investors
The desire to democratise access to private company investments, especially given that many companies stay private longer, is understandable. However, this noble intention often collides with the harsh realities of venture capital.
- High Failure Rate: The vast majority of venture-backed private companies fail. While the public often hears about the unicorns that go “to the moon,” they seldom see the scores of investments that go to zero or become “walking dead” companies. Retail investors, often inexperienced with such high failure rates, may underestimate this fundamental aspect of private-market investing.
- Information Asymmetry: Private markets operate with significantly less transparency than public markets. Financial statements are often unaudited, and the level of due diligence required exceeds what most retail investors can perform. Institutional investors engage with this reality, but individuals accustomed to the regulated transparency of public markets can find themselves at a severe disadvantage. This lack of clear information makes it easier for less scrupulous actors to promote speculative ventures.
The proliferation of Special Purpose Vehicles (SPVs) designed to allow individuals into private deals is a prime example. While some are legitimate, many are promoted by “interlopers” or “carpetbaggers” who may not even have secured the underlying stock. These vehicles often come with terms of service that explicitly state the high risk of total loss, yet the psychological impact of such losses is rarely anticipated by those new to this type of investing.
The investments that yielded 100x returns in AI were made years ago, before the current frenzy. While new lucrative AI investments will undoubtedly emerge, the odds for casual investors entering now are significantly lower. This is where a clear understanding of risk tolerance, not just perceived tolerance, becomes paramount. Many discover their true risk appetite only after experiencing a substantial drawdown, a lesson best learned before committing significant capital.
Investing Wisely in the AI Era
So, how should one approach investing in an environment characterised by both genuine technological revolution and intense speculation? The answer lies in discernment and a grounded perspective.
- Focus on Fundamentals: For professionals and investors, understanding the core technology and its long-term potential is paramount. Look beyond the hype to companies solving real problems with sustainable business models.
- Long-Term View: AI is a long-term play. Volatility and short-term speculative waves are inevitable. Investing with a multi-year horizon helps weather these fluctuations and capture the enduring value created by the technology. For more on long-term investment strategies, consider resources from institutions like Investopedia.
- Due Diligence: Whether investing directly or through funds, rigorous due diligence is non-negotiable. Question valuations, understand revenue models, and scrutinise the teams behind the technology. The lack of clean accounting in some private deals, as highlighted by current practices, demands extra vigilance.
- Risk Management: Be realistic about your risk tolerance. Do not chase speculative gains with capital you cannot afford to lose. For insights into managing investment risk, the Australian Securities and Investments Commission (ASIC) provides helpful guides on understanding investment risk.
The AI revolution is real, and its impact will be profound. However, it is unfolding within a market environment that is simultaneously attracting significant speculative capital. By acknowledging this dual reality, rather than debating a false dichotomy, we can make more informed decisions, whether as investors, entrepreneurs, or professionals adapting to an AI-driven future. Understanding the historical context of technological waves helps to demystify the current landscape and provides a clearer path forward. For further reading on the history of technological revolutions, consult the works of economic historians, such as those in Wikipedia’s economic history section.
