Bank of England Warns of AI Bubble Burst as Valuations Soar
The Bank of England has issued a stark warning about a potential rapid “correction” in the artificial intelligence sector, citing staggering valuation increases that have seen OpenAI’s worth jump from $157 billion to $500 billion in under a year.
Key Takeaways
- OpenAI’s valuation surged to $500 billion from $157 billion last October
- Bank of England warns of potential “rapid correction” in AI sector
- Most AI firms, including OpenAI, currently operate at significant losses
- Tech giants spending equivalent of Portugal’s GDP on AI infrastructure
Are AI Valuations Based on Reality or Hype?
The central question facing investors is whether current AI valuations reflect realistic future potential or are driven by unfounded optimism. With OpenAI reporting $7.8 billion in losses during the first half of this year despite its massive valuation, concerns about sustainability are growing.
“The question is whether these values are realistic or based on hype, excitement and unfounded optimism for the potential of AI,” the analysis notes. “Put simply, is AI’s value today a product of what AI will do in future or what people hope it may do?”
Echoes of the Dotcom Bubble
The current AI boom shows striking parallels to the dotcom bubble of the late 1990s. Like the internet frenzy that preceded it, the AI sector is experiencing rapid valuation increases despite many companies lacking profitability.
Investment excitement has spread to everyday investors who balance fear of missing out with concerns about investing in unfamiliar technology. Historical precedent shows that seemingly minor events can trigger massive selloffs, as happened when a March 2000 article warned that internet companies were running out of money.
The Profitability Problem
Despite soaring valuations, most AI firms operate at significant losses. OpenAI may need ten times more revenue to achieve profitability, raising questions about sustainable business models.
Some valuation appears supported by circular financing arrangements, such as the deal between OpenAI and Nvidia where each invests in the other. While this keeps operations afloat temporarily, investors will eventually demand returns.
Massive Infrastructure Investment
The scale of current AI investment is unprecedented. Meta, Alphabet, Microsoft and Amazon are collectively spending the equivalent of Portugal’s GDP on AI infrastructure this year alone.
This represents a bet not on immediate profits but on an AI-dominated future. As the analysis concludes: “The bubble will burst if and when this future is in doubt.”
Richard Whittle, University Fellow in AI and Human Decision Making, University of Salford and Stuart Mills, Assistant Professor of Economics, University of Leeds
