AI Market Resembles Early Internet Bubble Stage, Analysis Shows

The current bull market cycle is anticipated to culminate in a euphoric phase characterized by a substantial bubble, according to recent analysis. This forecast is grounded in historical parallels with the internet bubble of the late 1990s and early 2000s, which witnessed a rapid surge in stock prices driven by speculative investment and overvaluation.

The analysis underscores several key factors that contributed to the formation of the internet bubble and draws comparisons to the present market landscape. These factors include monetary easing, industrial policy support, and market irrationality. During the internet bubble, the Federal Reserve's interest rate reductions and the influx of foreign capital into the USA created a liquidity-rich environment that propelled stock market growth. Similarly, the current market has experienced a relatively loose monetary environment, with expectations for rate cuts surging twice in the past year, driving US Treasury rates to low points.

Industrial policy support also played a pivotal role in the formation of the internet bubble. The Clinton administration's Telecommunications Act of 1996 fostered the development of broadband and the internet, resulting in over-investment in infrastructure. In the current market, policies such as the CHIPS Act and the "Stargate" program have spurred investment in the AI industry, with investments related to AI technology expected to account for 6.9% of the GDP's investment scale by the end of 2024.

Market irrationality was another critical factor in the formation of the internet bubble. Venture capital flooded into the information industry, with investments experiencing significant year-on-year growth. Unprofitable and commercially unstable IPOs gained market popularity, and household asset allocation accelerated towards stocks. In contrast, the current primary market is more rational, with the scale of venture capital slowing down and the proportion of tech stock IPOs not nearly as high as during the bubble period.

The analysis also highlights the distinctions between the current market and the internet bubble. The current market is more focused on profitability, with earnings contributing 46% to the Nasdaq's 93% increase since the launch of ChatGPT at the end of 2022. In contrast, the internet bubble was driven almost entirely by valuation, with profit contribution only 21% during the bubble period from October 1998 to early 2000.

The analysis concludes that the current AI market resembles the early stage of the bubble formation from 1997 to 1998, but it has not yet reached the peak of the bubble in 2000. The market's performance, concentration, valuation, profitability, and sentiment are all similar to the early stages of the bubble, but the level of enthusiasm has not reached the peak of the bubble. The analysis also notes that the current market faces challenges in the short term, with policy randomness and the potential for supply-side inflation pressures creating uncertainty. However, if the uncertain policies can be tamed, valuation adjustments, rate cuts, and the introduction of growth-related policies could provide good entry points for the US stock market.

Cryptoquant analyst Crypto Dan wrote that the current 2024-2025 cryptocurrency bull market cycle exhibits different characteristics compared to the 2017 and 2021 bull market cycles. The analysis shows that the current cycle has experienced a phenomenon of "artificial market suppression" after a strong uptrend, which may be a cooling measure taken by large market participants to extend the bull market cycle.

Unlike the 7-8 month consolidation period in the mid-term of the 2017 cycle and the year-long consolidation period at the beginning of 2021 due to the COVID-19 pandemic, the current cycle saw two sharp pullbacks after strong uptrends in 2024. During the consolidation periods from March to November 2024 and January to April 2025, altcoins performed poorly, and market sentiment was significantly affected.

The analysis suggests that this bull market cycle is expected to end with a euphoric stage marked by a massive bubble.