Is The AI Bubble Going To Burst? – Henrik Zeberg (Transcript)

At the time it was at 50 cents, and he held onto it until the moment it actually reached around $1,400, so 2,800 times. And he’s not the only one that has done well when it comes to crypto. We’ve all heard of these Lambo guys or people that have jumped into something that seems ridiculous, only to see it go up 100 times.

The Psychology of FOMO

I don’t know about you, but I definitely can feel the FOMO. FOMO, what is that? FOMO, fear of missing out. Well, fear of missing out is something that is very deep in the human mind. It goes back to the times of, as we lived in hunters and gatherers, in groups. Being part of the group ensured food, security, mating, and being outside was dangerous. And that’s something we have taken on to us today also. If we’re not part of the group, if we don’t think alike, like the Jante Law is also kind of commanding, well, then it’s dangerous.

So fear of missing out, FOMO, is something that is deeply in us and is something that can make us maybe come up to conclusions or do things we don’t necessarily would do if we were just ourselves.

Even Geniuses Fall Victim

And this is not something just maybe I as a stupid person or people that don’t understand things do. Sir Isaac Newton is probably one of the most intelligent people that has ever lived. And in the 1700s, he actually was a victim of FOMO. So that was the time of the South Sea Bubble. Newton invested in, saw his stock rise, earned good money, got out, but saw his friends actually staying in and becoming even more rich. He FOMO’d in, invested more, actually a lot, and the bubble burst. And he went bankrupt.

He famously said afterwards, “I can calculate the movement of heavenly bodies, but not of the madness of men.”

The Power of Crowd Dynamics

So FOMO can make us do things we don’t want. That can be against what we actually, yeah, what is good for us. And that is actually also very visible, that crowd dynamics that is a part of when we talk about what is called the Smoke Room Experiment.

This is an experiment from 1968 where a group of applicants to a job are invited in to a room. Eight of the nine applicants are actors. They’re told to stay seated, just work on their assignment no matter what happens. One person is a real applicant. All of a sudden while they do their application, smoke comes through the door. When there are other people, the other eight actors are in the room, 90% of the time, people stay seated and do not report on the smoke, on the potential hazardous event that is unfolding. But when that person, the applicant is alone, 75% of them got up and actually reported on the smoke.

So crowd dynamics is something that changes the way we think.

And that is what actually also is part of why we see financial bubbles developing. If you look at financial bubbles, then we saw one of the largest financial bubbles back in the 1630s, which was called the Tulip Mania. It was at a time where the tulip had been introduced from the Ottoman Empire and for some reason it became the center of attention. People start buying it, a market arose up and people kept buying this tulip or the tulips not because of its utility, but because they thought they could sell it off the next day to earn money. The bubble burst and a lot of people lost a lot of money at the peak of that hype, of that mania. And that’s just to explain how mad it can become. One tulip bulb had the price of a house at that time.

Then we can fast forward to the 1840s, Britain. And this was at a time where a fantastic technology came out. Steam engine, the locomotive, promised to change the world and it certainly did. But the thing was, everybody thought that this is now changing ways also we’ll earn money and everybody FOMOed in. Thousands of companies rose up, were established. People thought this is a cannot lose opportunity. And again, we saw how a bubble burst and a lot of people actually lost money. And this was still because even though there was a really fantastic technology that changed the world.

The Roaring Twenties Bubble

We can then fast forward to the Roaring Twenties and try to imagine, that was at a time where we just saw the end of the First World War, we saw the electrification, we saw the technology of a car, we saw a radio coming out. Try to imagine sitting there in your silent home, all of a sudden you can turn on the radio and you can hear people speaking to you. That was quite something, turning on the light, sitting, getting yourself into the car and driving instead of having horses. We think we have seen technology leap in technology, well, I can tell you that was special.

And what happened then? Again we saw people FOMO into it because this is of course a new world, this new time, forget about the old world. And a massive bubble unfolded. Again it burst and as we probably know, as we have heard from school, we saw the stock market crashing, we saw the last depression in the U.S. and elsewhere because of this FOMO.

The Dot-Com Bubble

And then we can fast forward to something we may be able to remember, at least some of us with a little more gray hair. So that was the dot-com bubble. And this was at a time where another new technology came out, just like the steam engine and the radio and now we have the internet. And everybody again FOMOed in, what’s not to like? Fantastic opportunity, the world is new, new economy they called it. And it’s no longer about how much you earn, it’s about how much you spend on marketing.

And there were fantastic support to this. Wall Street were all behind it, media were all behind it. There were media darlings like Webvan and Pets.com. 13, I think it was, of the 18 companies that were on commercial on the Super Bowl in 2000 didn’t exist a year later. So the media were all over this. Everybody was praising this new fantastic and brave world. Did the internet change the world? Absolutely. But is that the same as a promise that you cannot see that the market can crash or that people get exuberant? No.

Bitcoin and the Emperor’s New Clothes

So now I want to talk about Bitcoin because I think Bitcoin is the very definition of this financial bubble we have at this point, AI and crypto bubble. But before I do that, now we talked about Jante, but I’m from Denmark. In Denmark we have a famous fairy tales teller, Hans Christian Andersen, who had the story or told the story of “The Emperor’s New Clothes.” And this is the story for the ones who don’t know it already, of course.

This is about the emperor who lived in his empire. And one day two fraudsters came to town and those were tailors. They would be able to make the most fantastic clothes that he had ever seen. So he could stand out really nice. He was very vain. And he, of course, got intrigued. There was, though, however, this one caveat to it, that if people were especially stupid or were not good at what they do, they would not be able to see the clothes. And the emperor thought that was interesting and he sent them off.

And they started to work, the two fraudsters, on their looms, weaving and making the clothes. The emperor got impatient and sent off his best advisor and said, can you go to see the check on how it’s going? The advisor came to the fraudsters and couldn’t see the clothes. And he thought, what is that going to tell of me if I can’t see that clothes? I’m not going to do that. So he went back to the emperor and said, oh, that’s amazing, sir. You love it. It’s fantastic.

And then the emperor thought, okay, I got to go see myself. And he went and again, he couldn’t see the clothes. And he thought, what is that going to tell my people about who I am and how I run the country? So what he did was, again, like his advisor, to simply just keep silent. And the day came where he was supposed to walk down the street, as we do when we get new clothes, we like to show it off. And he was, the fraudsters helped him put on the clothes and he walked down the street.

And everybody, all of the crowds were saying how fantastic this was, especially the elite. Wow, amazing garment. Until a little boy cried out, but why isn’t he wearing any clothes?

The Innocent Mind Sees the Truth

Now why I’m saying that, what is the morale? And of course, that sometimes it takes an innocent mind, naive mind maybe, to point out what is the obvious. And now I want to turn to Bitcoin, because as I said, we currently have the largest financial bubble that we have ever seen. We had just told you about four massive bubbles, and I’m claiming we have one that is even bigger.

Market Cap to GDP: The Ultimate Bubble Indicator

Warren Buffett and Charlie Munger had a way of looking at that. That is the market capitalization to GDP, a ratio, let’s just put it there. The higher it is, the bigger the bubble. In 1929, 89% was the number there. 2000, massive bubble. We laughed at it afterwards. It was 136%. 2007, it was at 107%. These are the two lumps you see there. This is where we are today, 226%.

And we can just look at some of the businesses that are doing well today. As I said, crypto and AI bubble, Nvidia, Palantir. It looks like the tulip bubble to me. I mean, you don’t need to know much about finance to see that, you know, 94,000% in a matter of 15 years, that’s a pretty profit. NASDAQ, Bitcoin, Bitcoin is up 1.2 million percent since 2012.

Bitcoin’s Inevitable Crash

So now people say, yeah, but, you know, it can keep going up. Well, if you have a bubble and it bursts and you can see that NASDAQ and Bitcoin are following each other very, very closely, and you also know that NASDAQ actually tumbled, crashed 85% after 2001 in that massive bubble, that is way smaller than what we have today. Now, guess what is going to happen to Bitcoin when Bitcoin crashes much, much more every time we see a decline in NASDAQ? I say Bitcoin is going to crash by 95%.

That’s not what we hear when we hear the media, the academia, the crowd and the Emperor’s New Clothes talking about this.

The Recession Warning Signs

So, and then we also have a situation where we have a slowdown in the economy. It’s very visible. We don’t need to know much about economy to see these rounding bottoms. This is unemployment level in the US. Every time they move up, you get a recession. A recession is where bubbles burst. And when a bubble bursts, you’re going to hurt if you have those assets that are crashing.

So let’s say, all right, we have a recession coming and NASDAQ dropped by 85% in 2001. And we have a larger bubble this time, much larger. What is going to happen if the economy falls into a recession and we see NASDAQ crashing in this AI bubble we have?

Conclusion: Technology Doesn’t Guarantee Returns

I say Bitcoin, crypto is a massive bubble. It doesn’t take away that there is a technology just like in the locomotive, steam engine, and also what we saw with the radio and so on. But it’s not the same as guaranteed returns. And I think we’re going to see this in a not too distant future. It’s a bubble that is going to burst.

I think Warren Buffett and Charlie Munger are right. Bitcoin, crypto is like a venereal disease.

Thank you.

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