🤖 AI Can Win and Still Crash
FIRE BTC Issue #86 - What the railroad boom explains about bitcoin's weakness and the AI investment cycle.
I don't think I'm alone in feeling like it's hard to stomach watching the stock market and the AI trade outperform bitcoin recently.
The bitcoin thesis has seemingly never been stronger, something I wrote about in Bitcoin is Ded, Long Live Bitcoin. But the price has been lagging, and it feels like we're enduring a bear market while everything else around us is ripping.
A dominant narrative, which I think makes a lot of sense, is that the AI trade is absorbing a large amount of capital. Money is going into these companies and the infrastructure being built around them, which is driving investment higher and supporting their stock prices while bitcoin is left fighting for attention and liquidity.
This doesn't make me doubt the thesis for bitcoin, but it's understandable that it would generate frustration and feelings of FOMO. In hindsight, selling bitcoin and aping into AI stocks would have been the better trade over this recent stretch. Most of us didn't do that, and watching it happen from the outside isn't fun.
The frustration creates a more consequential risk. If you're building toward financial independence with bitcoin, years of AI outperformance can persuade you to abandon a sound plan and chase a trade you don't understand at exactly the wrong time.
But there is another reason this comparison has been on my mind. I use AI tools every day, and I am more convinced than ever that AI will transform the economy. At the same time, I think it's perfectly possible that many of the investments being made in AI today will produce terrible returns.
Those views fit together once you separate the success of a technology from the returns earned by the companies, projects, and securities financing its buildout. Readers looking for an AI stock pick or an exact date for the bust won't find one here. The useful question is whether AI outperformance should change your FIRE plan.
The railroad boom of the 19th century gives us a way to answer that question. It shows how a transformative technology can survive an investment bust, how the same process may eventually benefit bitcoin, and how to decide which capital protects your FIRE timeline before speculative AI exposure becomes an option.
🧰 The Technology Is Real
I wrote in Dropout Economics that AI is bigger than the iPhone and that the barrier to building has collapsed. That's absolutely still my view, and every day that I work with AI tools strengthens that conviction.
These tools are transformative in the way knowledge workers can do things and what they can build. I've been able to build more, do more, and write more as a result of having them at my disposal.
The iPhone gave everyone a computer in their pocket. AI gives everyone a team in their pocket: a developer, a designer, a researcher, and a strategist. You bring the creativity, the judgment, and the domain knowledge. AI brings the execution speed.
We're also starting to get a much clearer view of how AI will be integrated into the way people work, whether it's individuals, small businesses, large corporations, or governments. Most people haven't experienced this yet. They're still using ChatGPT as a fancy search engine that's giving them better results, but they aren't yet experiencing the transformation in the way they work and interact with the digital and physical worlds.
That is coming in the very not-so-distant future. Growth may move through peaks and plateaus as people absorb new tools, but I don't think demand for AI is going anywhere but up over time. More people and organizations are going to use more intelligence and more compute as these tools become useful across more parts of the economy.
That still doesn't mean the insane valuations that a lot of AI companies have garnered on the market will be sustained, or that every data center and power project under construction will earn an attractive return.
🚂 The Technology Was Real Then, Too
Financial historian Liaquat Ahamed's new book, 1873, tells the story of a previous infrastructure boom that was every bit as transformative to its era.
The expansion of the global bond market in the 1850s and 1860s channeled enormous pools of savings into railroads, ports, undersea cables, sovereign borrowers, and other infrastructure. Much of this investment was rational at first. Railroads compressed distance, connected markets, made it cheaper to move goods and people, and became essential to the growth of the United States.
They also attracted a frenzy of speculation, overinvestment, and wasteful borrowing.
Railroad companies had to spend heavily before the demand for a new route was known. Each company wanted to connect the next market, own the best path, and become the dominant network. When too many companies made the same calculation, construction moved ahead of demand and returns began to fall.
Federal Reserve History describes how European investors began selling American railroad bonds in 1873, which lowered prices and cut off financing. Without enough cash to fund operations or refinance debts, railroad companies failed or defaulted, and Jay Cooke & Co., the merchant bank heavily invested in the Northern Pacific Railway, went bankrupt. The New York Stock Exchange closed for ten days, and at least 100 banks failed across the country.
The financial damage didn't make the railroads useless. The infrastructure survived, changed hands, was recapitalized, and eventually supported decades of economic growth. But the investors who financed the wrong railroad, at the wrong price, with the wrong balance sheet could still lose most or all of their money.
A real technology or infrastructure boom can produce bad returns. Capital can be pointed in the right general direction but at the wrong time, or it can be pointed toward the wrong things at the margin.
If AI is as transformative as I believe it is, the investment question becomes how much infrastructure the eventual demand can support, how quickly revenue can catch up, and how much of that future has already been pulled forward into today's spending and valuations.
For a bitcoin investor working toward FIRE, correctly identifying the winning technology still doesn't tell you which security to own, what price to pay, or how much of your plan to risk.
