Bitcoin Mining Enters AI Amid Bubble Warnings

As Bitcoin mining companies accelerate their migration towards artificial intelligence (AI) by selling reserves and entering into multi-billion dollar infrastructure agreements, warnings arise about a potential financial bubble driven by excessive capital spending in the AI sector.

The trigger for this operational shift is a compressed revenue cycle for Bitcoin miners, who are seeking more profitable alternatives. At the same time, the Bitcoin network recorded an 18.5% drop in mining difficulty from its all-time high, marking the largest correction in this metric since the ban in China in 2021.

In light of this situation, Bitcoin mining finds refuge in AI. A prime example is MARA, one of the largest mining firms in the United States, which sold part of its bitcoin (BTC) to finance operations and expand its business into this technology.

Similarly, the miner IREN signed an agreement with Nvidia valued at $3.4 billion on May 7, allocating $2.1 billion for infrastructure deployment, as reported by CriptoNoticias.

However, this rapid foray occurs amid financial alerts. Analyst Uttam Dey assessed the sector's situation. I believe we are in an AI bubble. At least according to the textbook definition of a bubble. The specialist added that the mere mention of the word 'bubble' starts to generate confusion and chaos (once again) among the investing community.

A financial bubble occurs when the price of an asset rises to levels far above its historical norms or intrinsic value. In this case, all asset bubbles occur because stocks or other goods are traded well above their real value.

The root of this concern---according to the analyst--- comes from capex or capital expenditures in AI, a term that refers to the funds a company invests in acquiring, upgrading, or maintaining long-term physical assets. In this industry, it includes the purchase of data centers and graphics processors. This expenditure is not immediately deducted as a loss but is capitalized on the balance sheet. High capex indicates that companies are allocating massive amounts of money to infrastructure. If that investment does not generate proportional revenues in the medium term, analysts interpret it as overheating.

Attention is focused on the four major hyperscalers --- the companies providing technology services and massive infrastructure capable of scaling data centers and servers globally, comprising Alphabet (Google), Amazon, Meta, and Microsoft---, which are now set to increase their capex budgets by over 80% to $750 billion this year, according to the analyst.

Regarding the direct impact on corporate cash flow, Dey stated that specifically, the concern is that hyperscalers are deploying such aggressive capex sums that it has led to significant reductions in their free cash flow, bringing it to one of the lowest levels in the last decade.

This can be seen in the following chart of the combined free cash flow of Google, Microsoft, Amazon, and Meta. By 2026, high infrastructure investments brought the total to levels close to $20 billion, even recording quarters with negative balances in firms like Amazon and Google.
The higher the capital expenditure to purchase data centers, the lower the available free cash flow. Source: Seeking Alpha.

In light of the history of these warnings in the tech markets, the specialist recalled that it should be noted that this is not the first time investors and research firms have talked about a bubble. In March 2024 was the first moment I remember when some investors labeled this as an AI bubble.

Regarding the similarities with previous financial crises, Dey says that in his opinion they were similar events that popped bubbles in the dot-com bubble of 1999 and the stock market crash of 1929. With the amount of debt being issued in the United States, it is likely that a rate hike could pop this AI bubble.

The debt volume in the current industry keeps interest rates under observation. Projections indicate that debt issuance related to AI will increase by 25% to $2.25 trillion this year. So far, the odds of a rate hike have decreased this week, concluded Dey. The evolution of credit will determine whether the miners' transition to AI will consolidate their balances or expose them to a severe market correction.

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.