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The increasing correlation between Bitcoin and stocks tied to artificial intelligence, along with credit markets, puts it at risk of a potential unwind in the AI bubble. However, a return to easing monetary policies might revive Bitcoin as liquidity re-enters the market.
Summary
- Bitcoin’s rising connection with Nvidia, Oracle, and the Nasdaq heightens its vulnerability to any sudden, AI-driven risk-off moves and credit reevaluations.
- Warnings from central banks and the IMF indicate that AI-inflated valuations, leverage, and private credit structures may lead to a chaotic correction across risk assets.
- Analysts suggest that an AI credit crisis would likely impact Bitcoin first, but historical trends show that subsequent monetary easing typically results in significant Bitcoin gains as liquidity returns.
Analysts caution that Bitcoin faces a dual threat from a potential correction in the AI bubble.
The Deepening Connection Between AI and Bitcoin
On December 11, Oracle Corp saw a notable dip in its market value after reporting underwhelming revenue and announcing increased capital expenditures related to AI, partly funded through elevated debt levels. This decline also impacted shares of Nvidia Corp, Advanced Micro Devices Inc, and the broader Nasdaq index, with market reports labeling it as evidence of heightened “AI bubble” apprehensions.
Coincidentally, Bitcoin’s value also dropped on the same day, with analysts attributing this to a dampened risk appetite linked to weaknesses in the AI sector. Analyses showed a significant rise in correlation between Bitcoin and Nvidia leading up to Nvidia’s earnings in November, while data for the Nasdaq indicated a substantially positive aggregate correlation as of December 10.
Since the Federal Reserve started cutting interest rates in mid-September, Bitcoin has seen declines, whereas the Nasdaq has experienced gains during the same timeframe, according to market data.
Reports from Reuters indicate that AI-linked valuations, alongside macroeconomic indicators like the Buffett Indicator, have pushed overall U.S. equity valuations above those seen during the dot-com era. Major tech firms have secured large amounts of capital this year through bond issuances to support data centers and infrastructure development.
According to Moody’s chief economist, AI-driven borrowing now surpasses the debt levels in the technology sector prior to the dot-com crash. Several analysts have raised alarms about a substantial funding gap for AI infrastructure, as expenditures far outpace current revenue for many firms.
The Bank of England’s financial stability update specifically pointed out overstretched valuations in AI-focused companies and cautioned that a significant correction in AI-related stocks could pose risks to broader markets through leveraged entities and private credit exposures. The European Central Bank’s Financial Stability Review noted that the explosion of AI investments is increasingly financed through bond markets and private capital, making it more sensitive to fluctuations in risk sentiment and credit spreads.
Estimates reveal a dramatic increase in financing deals for AI-related data centers and infrastructure, fueled by bond issuance, private credit, and asset-backed securities. Some analysts have drawn comparisons between existing structures and opacity levels to patterns observed before the 2008 financial crisis.
Oracle’s plans for capital expenditures on AI data centers, coupled with rising long-term debt and increasing credit-default-swap spreads, exemplify the type of inflated balance sheets that have raised concerns among regulators, according to financial experts.
Research demonstrating the relationship between Bitcoin and global liquidity shows a strong positive correlation, with Bitcoin acting as a “liquidity barometer” that tends to perform well when global liquidity expands and poorly during contractions, according to market studies.
In the event that AI-related credit markets encounter significant stress, Bitcoin could face initial selling pressures as macro and growth funds scale back their positions during deleveraging phases, analysts suggest. Nevertheless, this situation might also prompt central banks to ease financial conditions in response.
The International Monetary Fund’s Global Financial Stability Report highlighted that AI-driven concentration and inflated valuations in risk assets increase the chances of a “disorderly correction” and stressed the importance of crafting monetary policies to help mitigate amplified shocks.
Following the market upheaval due to COVID-19 in March 2020, aggressive quantitative easing and liquidity measures from central banks coincided with a marked increase in the overall value of the cryptocurrency market in the ensuing years, as shown by market data. Studies correlating Bitcoin’s performance with global liquidity and the dollar index indicate that episodes of monetary easing and a weakening dollar traditionally herald significant increases in Bitcoin’s price.
Recent market pressures have redirected capital back toward Bitcoin, rather than alternative cryptocurrencies, resulting in an increase in Bitcoin’s market dominance amid tight liquidity and rising volatility, according to market data. Exchange-traded funds have acted as gateways for institutional investment in Bitcoin.
Market analysts note that the main challenge for Bitcoin lies in its current inability to decouple from the AI-driven trade, whereas its performance over the medium term will largely depend on policy reactions to any impending corrections in the AI sector. In the immediate aftermath of a contraction in AI credit, Bitcoin is likely to decline due to its sensitivity to macroeconomic risks and liquidity shifts. However, in the following months, should central banks engage in renewed monetary easing, Bitcoin has historically benefitted from such conditions as liquidity re-enters risk assets, following established market patterns.
Oracle’s earnings report on December 11 offered further proof of this correlation, with Bitcoin experiencing declines in the same trading session that saw substantial losses in Oracle’s market capitalization, analysts pointed out.
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