How Likely Is an AI Bubble?

Is the AI Boom About to Explode into a Massive Bubble?

The world is buzzing with the conviction that artificial intelligence is the new internet. Companies are investing as if the future cannot wait, investors crowd around anything that breathes “AI,” and governments see data and algorithms as the foundation of their competitiveness. Yet every technological breakthrough also has a shadow side: the possibility that we are once again overvaluing ourselves. The question is not whether AI is important, but whether current valuations still align with reality.

Those who study the history of innovation driven bubbles recognize a familiar pattern. From the Railway Mania in Victorian England to the dot com explosion at the end of the 1990s, a revolutionary idea has always provided the fuel for overheated expectations. Today, AI seems to operate in the same tension field: between structural transformation and temporary fever. We stand at a crossroads where the promise of trends meets the psychology of markets [1].

Lesson 1: History Repeats Itself, But Never Literally

The first recorded speculative bubble, the Tulip Mania of 1636, ended when traders could no longer sell their bulbs. Three centuries later, investors poured their savings into railways that would never be profitable. In 1929, the Dow Jones lost nearly ninety percent of its value, and in 2000, five trillion dollars of dot com capital evaporated in less than three years [2] [3]. Yet after every crash, a tangible legacy remained: railways, power grids, fiber optics infrastructure that later strengthened the economy.

This paradox is crucial. A bubble can be both destructive and productive. It destroys capital but accelerates adoption and innovation. The internet after 2000 flourished precisely because of the overcapacity built during the frenzy. That is why AI deserves more nuance than simplistic optimism or doom thinking. The real question is not whether it is a bubble, but which phase of the cycle we are currently in.

Lesson 2: The Current AI Momentum Smells Like Overheating

The market dynamics are familiar: capital is cheap, narratives are compelling, and fear of missing out pushes prices higher. AI companies are valued at tens or even hundreds of times their current revenue. Startups without profit write ten-digit valuations based purely on the promise of growth. When OpenAI reached a market valuation above 150 billion dollars in 2025, it felt not only ambitious but symbolic of an era in which hope is traded as an asset [4].

Meanwhile, governments are investing billions in national AI agendas, from Washington to Beijing. This strategic race reinforces the narrative that speed matters more than caution a classic breeding ground for overvaluation. strategy is not a luxury here but a survival requirement.

There are, however, essential differences from earlier manias. Major players such as NVIDIA, Microsoft, and Alphabet operate profitably; the sector is largely financed with equity rather than debt, which reduces systemic risk. Yet the saturation of look-alike startups, the shortage of GPUs, and the inflation of “AI labels” make the likelihood of a correction real. The market is hot but still rationally combustible [5].

Lesson 3: Psychology, Perception, and Timing

The most intriguing paradox is that the more people talk about a bubble, the smaller the chance it will burst in the short term. During the dot-com years, warnings were ignored; now, the warning itself is trending. Central banks are monitoring the risk, investment funds are limiting exposure, and even insiders like Sam Altman warn that “some investors will lose large sums” [6].

Market data confirm that we are in a transitional phase. The inflow of capital is significant but not massive enough to call it hysteria. Retail leverage remains modest, IPO activity is low. Historical datasets (Shiller CAPE, CB Insights, IMF risk outlook) indicate that a combination of high valuations without high debt rarely ends in systemic crisis. That makes the current moment not safe, but dangerously manageable.

For policymakers and companies, this is the lesson of governance: recognize the risk, build safeguards, but don’t stifle innovation. The real danger is not only that a bubble bursts but that fear of a bubble paralyzes progress.

Conclusion: Hot, But Still Rationally Combustible

The key question remains: how likely is it that the AI boom will end in a bubble that truly bursts? Based on historical patterns from tulip bulbs to dot coms a realistic probability range is 30 to 45 percent [5][6]. That is well above normal market risk but below the threshold of systemic panic.

Quantitative models divide the risk into three zones:

• Below 30 percent = normal volatility, healthy corrections within a bull market
• 30 - 45 percent = historically elevated but still manageable risk
• Above 50 percent = system-critical, only under extreme leverage or collective mass hysteria

AI clearly sits in that middle zone: hot, but still rationally combustible. A correction would be painful but not catastrophic. Most analysts expect a cycle of cooling and consolidation rather than an implosion. The technology is real, the valuation partly fictional and it is precisely in that tension that innovation usually reaches maturity [1].

Those who invest now should focus on real-world applications (application): where AI demonstrably delivers productivity, efficiency, or new value. That is where sustainable growth will arise, even after the hype. The rest will fade, like the railways of 1847 or the startups of 1999 remembered as the fuel of progress, not as failure.

References

[1] Ritholtz B. A short history of bubbles. The Big Picture. 24 Oct 2025. Available at: https://ritholtz.com

[2] Federal Reserve History. Stock Market Crash of 1929. G. Richardson. Available at: https://www.federalreservehistory.org

[3] Investopedia. Understanding the Dotcom Bubble: Causes, Impact, and Lessons. Available at: https://www.investopedia.com

[4] UBS CIO Daily. Can the AI rally push on higher? 9 Oct 2025. Available at: https://www.ubs.com

[5] Acadian Asset Mgmt. No, we are not in a bubble yet. 2025. Available at: https://www.acadian-asset.com

[6] Associated Press. Is there an AI bubble? Financial institutions sound a warning. Oct 2025. Available at: https://apnews.com