In my previous article, “AI frenzy: Great innovations do not always translate into great investments” I discussed how investors often confuse technological breakthroughs with sustainable profitability. The key message was that while Artificial Intelligence (AI) represents one of the most transformative innovations of our time, it doesn’t guarantee that every company riding the wave will deliver long-term value.
Building on that thought, a deeper concern has now emerged — a potential feedback loop forming within the AI ecosystem, reminiscent of the fiber-optic bubble of 2000. The similarities are subtle but striking, particularly in how capital and optimism are circulating within the same closed network of technology giants, creating an illusion of unending growth.
Understanding the Feedback Loop
A feedback loop is a process where the output of a system becomes the input for the next cycle, amplifying growth until it detaches from reality. In financial terms, it occurs when companies, investors, and capital reinforce each other’s projections — manufacturing momentum that looks like progress but is often just a circular validation.
The Fiber-Optic Bubble of 2000 — The Original Loop
At the turn of the millennium, telecom equipment makers like Lucent Technologies and Nortel Networks were the face of the internet revolution. With investors demanding endless revenue expansion, these firms began financing their own customers i.e. telecom operators so that those operators could continue buying their equipment.
Soon, the ecosystem became self-referential. Equipment vendors were lending to buyers, taking stakes in them, or even purchasing capacity back from their own customers to keep revenues flowing.
On paper, everything looked brilliant, sales were up, networks were expanding, and the future looked wired for growth. In reality, it was an illusion of demand, fuelled by the recycling of the same capital. When the bubble burst, it wiped out trillions in market value and reminded everyone that cash flows, not circular transactions, sustain growth.
The Modern Echo — AI’s Interconnected Web
Two decades later, we’re witnessing a similar pattern in AI — but this time more sophisticated. Instead of telecom cables, this time it is Graphics Processing Units (GPUs), cloud servers, and AI infrastructure forming the loop.
Leading Chip-maker, AI labs, and cloud providers are increasingly investing in each other, buying each other’s services, and jointly announcing partnerships that raise valuations across the board. Feedback Loop in AI World Today
It’s a virtuous circle as long as demand continues to outpace supply — but a dangerous one, if underlying monetization fails to keep up.
The latest developments, including Open AI’s partnership with AMD, strategic cloud tie-ups with Oracle and Microsoft, and the massive parallel investments in AI data centers, have further intensified this cross-holding network. When analysts questioned whether capital invested by one AI leader could indirectly fund its competitor’s chips, the silence was telling — it showed just how tangled the money flow has become.
Why It Matters for Investors
So far, this interplay has been incredibly rewarding for shareholders. Trillion-dollar market caps, record-breaking chip revenues, and index highs have become the norm. Some of these partnership valuations run into hundreds of billions of dollars, lifting global sentiment and drawing massive inflows into AI-related ETFs and technology stocks.
Yet, if too much of this growth comes from intra-industry spending rather than end-user adoption, we risk building castles on the same foundation of optimism that crumbled in 2000.
The Final Takeaway
The dot-com and fiber-optic bust of the early 2000s didn’t occur because the internet was a bad idea, it happened because expectations ran ahead of monetization. The same risk shadows AI today.
While the technology is real and its potential immense, the increasingly insular nature of AI investments suggests that we may be seeing early signs of a feedback loop — one that rewards short-term momentum but may eventually test the strength of long-term fundamentals.
For investors, the lesson remains the same: great technologies can transform the world, but great investments require discipline, demand, and sustainable cash flows.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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