Understanding the AI Bubble’s Impact on Bitcoin
The recent market volatility, particularly the significant drop in Oracle’s market value, has sparked concerns about the potential “AI bubble” and its effects on Bitcoin. On December 11, Oracle’s market value plummeted by about $80 billion due to revenue shortfalls and increased investments in AI, which rose to $50 billion from $35 billion, partly funded by rising debt. This event not only dragged down tech stocks like Nvidia and AMD but also had a ripple effect on the broader Nasdaq. As a result, Bitcoin slipped below $90,000, likely due to concerns that the AI sector could curb risk appetite.
According to an analysis by 24/7 Wall St., the correlation between Bitcoin and Nvidia reached about 0.96 over a rolling three-month period leading up to Nvidia’s November results. Additionally, data from The Block shows that as of December 10, the 30-day overall Pearson correlation coefficient between Bitcoin and the Nasdaq was 0.53. This suggests that Bitcoin’s price movements are closely tied to the performance of tech stocks, particularly those related to AI.
The AI Bubble Narrative and Its Implications
The AI bubble narrative has gained significant attention in recent weeks, with reports indicating that AI-related valuations and macroeconomic indicators have pushed broad U.S. stock valuations past dot-com era extremes. Major technology companies have raised hundreds of billions of dollars in bonds to finance data centers and hardware, with Morgan Stanley estimating the funding gap for building out AI infrastructure at about $1.5 trillion. Essays in The Bulletin of the Atomic Scientists and The Atlantic have put AI spending at about $400 billion this year, while revenues are only about $60 billion, suggesting that most companies are making large losses.
The calculation suggests that the overall economy is now partly dependent on an AI investment boom that cannot last forever. Central banks, including the Bank of England and the ECB, have expressed concerns about the stretched valuations of AI-focused companies and the potential risks to broader markets. The Bank of England’s latest stability update specifically highlights the risks posed by leveraged players and private credit exposures in the AI sector.
The Liquidity Mechanism Exacerbating an AI Bust for Bitcoin
If the AI bubble bursts, the damage to Bitcoin will go beyond mere correlation as AI investing becomes more of a credit story. AI-related data center and infrastructure financing deals have increased significantly, driven by issuances of bonds, private loans, and asset-backed securities. Analysts have compared some of these structures and opacity to patterns before 2008, warning of “untested risks” if tenants or cash flows disappoint.
When an AI bubble bursts, these spreads widen, funding costs rise, and leveraged funds are forced to reduce their gross exposure. Bitcoin is at the end of this chain, and its price will likely be affected by the decline in global liquidity. Chinese researchers’ analysis of Bitcoin versus global liquidity shows a strong positive relationship between Bitcoin prices and global M2, or broad liquidity indices, describing BTC as a “liquidity barometer” that performs well when global liquidity is high and poorly when global liquidity is shrinking.
Act Two: How the Policy Response Could Fuel Bitcoin’s Next Bull Cycle
The other half of the story is what happens after the first wave of deleveraging. The same institutions that worry about an AI-driven correction also implicitly point to the likely response. If the overleveraged AI and credit markets falter so much that growth is threatened, central banks will ease financing conditions again. The IMF’s latest Global Financial Stability Report warns that AI-driven equity concentration and stretched valuations of risk assets make a “disorderly correction” more likely, emphasizing the need for cautious but ultimately supportive monetary policy to avoid compounding shocks.
History provides a template. Following the COVID shock in March 2020, aggressive quantitative easing and liquidity provision coincided with a massive increase in total crypto market cap from about $150 billion at the start of 2020 to about $3 trillion at the end of 2021. A recent Seeking Alpha report compared Bitcoin to global liquidity and the Dollar Index, showing that BTC tends to make big bullish moves in subsequent quarters once easing begins in earnest and the dollar weakens.
Bitcoin’s Structural Problem and the Road Ahead
Bitcoin’s structural problem is that it cannot decouple from AI trading in the short term, but its medium-term upside potential depends on policy responses to an AI crash. In the immediate aftermath of an AI credit crisis, Bitcoin bleeds because it represents the high-beta tail of macro risk and global liquidity contracts react faster than most assets can adjust. However, if central banks respond with further easing in the following months and the dollar weakens, Bitcoin has a history of outsized gains as liquidity flows back into risk assets and speculative narratives are relaunched.
The question for allocators is whether Bitcoin can weather the first hit well enough to benefit from the second wave. The answer depends on how severe the AI correction is, how quickly policy changes, and whether institutional flows via ETFs and other stressed vehicles hold up or collapse. As the AI bubble narrative continues to unfold, one thing is certain – Bitcoin’s fate is closely tied to the performance of the AI sector and the policy responses that follow. For more information, visit https://cryptoslate.com/if-an-ai-bubble-pops-does-btc-bleed-or-benefit/
