Author: CryptoSlate

Translated by: Deep Tide TechFlow

Deep Tide Introduction: The Bank for International Settlements warns that the five major technology giants will spend $1 trillion on AI infrastructure from 2025 to 2026, and if the investment returns fall short of expectations, financing tightening could first impact risky assets like Bitcoin. While loose monetary policy may benefit Bitcoin in the long term, traders must first weather this round of sell-offs.

Over the past year, AI trading has become one of the main pillars supporting global risk appetite.

However, now the Bank for International Settlements is warning that if expected returns fail to materialize, this spending spree could turn into a source of financial stress.

The institution, based in Basel and advising central banks worldwide, noted in its annual economic report that the capital expenditures related to AI from the five major cloud computing giants will exceed $1 trillion in 2025 and 2026.

The Bank for International Settlements stated that such massive investment raises the question: Have companies invested too much capital before their business model has been fully validated?

The Bank for International Settlements stated:

"Returns falling short of expectations could trigger a sudden withdrawal of financing, converting the capital expenditure frenzy into a protracted investment slump, and generating a ripple effect on financial conditions."

For Bitcoin traders, the implications of this warning extend far beyond the chip and data center race in Silicon Valley.

The abrupt reversal of AI spending could tighten liquidity in stock and credit markets, forcing cryptocurrencies to face a tough test: will Bitcoin first behave like another risky asset in the sell-off, or will its long-term monetary narrative regain strength after the shock?

AI Spending Frenzy Attracts Central Bank Attention

As a forum for central banks, the Bank for International Settlements warned in its annual economic report that the race for dominance in artificial intelligence may be pushing investments toward levels that future returns cannot support.

The Bank for International Settlements stated:

"If supply bottlenecks limit production, the current surge in capital expenditures may not be sustainable. Intense competition for market leadership may further fuel over-investment, as seen in previous waves of innovation, and if AI returns are disappointing, the risk of a sharp reversal will increase."

The issue is not that AI lacks economic potential. The Bank for International Settlements stated that this technology could ultimately boost productivity in ways different from earlier waves of automation and software development. If AI systems can self-improve and help generate new ideas, the long-term macroeconomic impact could be significant.

However, the recent financial risks are different. Companies like Google, OpenAI, and Anthropic have poured massive funds into projects without clear indications of how much revenue the spending will generate, how long those revenues will last, or how quickly the infrastructure behind AI will become obsolete.

In reality, the largest tech companies have been spending heavily on chips, cloud capacity, data centers, power supplies, and network equipment to compete for users and market share.

The scale of this competition has helped solidify investor confidence in tech stocks while also boosting demand for suppliers and infrastructure companies related to AI construction.

But the Bank for International Settlements warns that fierce competition itself creates vulnerabilities. If each major player significantly spends to avoid falling behind, the entire industry may face overcapacity, reduced returns, and a financing structure that is difficult to maintain once optimism wanes.

This dynamic has occurred before. The Bank for International Settlements cites earlier investment frenzies related to canals, railways, electrification, and the internet.

While each technology ultimately changed the economy, they also led to periods of overly rapid and excessive investor financing, resulting in painful reversals.

In light of this, the Bank for International Settlements concluded:

"The scale and speed of the current AI investment frenzy, coupled with expectations of significant productivity enhancements, highlight recent potential downside risks similar to these precedents."

Compounding the issue are severe physical bottlenecks. The voracious demand for computing power is tightening supplies of advanced semiconductors, grid equipment, and raw electricity.

According to the Bank for International Settlements, this surging demand has been pushing up electricity prices, potentially filtering into broader inflation metrics—while geopolitical conflicts in the Middle East have independently stressed global supply chains.

Stock Market Uptrend Amidst Accumulated Credit Risks

Meanwhile, the concerns of the Bank for International Settlements go beyond a mere correction in the stock market; they consider how an AI shock may affect the broader financial system.

While the early stages of AI development were largely funded by the vast cash reserves of Silicon Valley giants, the current trillion-dollar-scale investments increasingly rely on debt and increasingly opaque financing structures.

The Bank for International Settlements pointed out that AI infrastructure now spans corporate debt markets, private credit, leasing financing, data center construction, energy contracts, and supplier agreements.

Chip manufacturers, cloud providers, AI labs, and data center operators are becoming increasingly interconnected through equity investments, procurement commitments, and long-term capacity deals.

In fact, the Bitcoin-focused financial services firm Onramp Bitcoin recently noted:

"A network of overlapping commitments now binds AI construction into a roughly $1 trillion loop: Nvidia invests in AI labs like OpenAI, labs rent cloud capacity from Oracle and CoreWeave, and these cloud service providers buy Nvidia chips. The same dollar can simultaneously be recorded as investment, financing, revenue, and sales, making the headline figures less meaningful than they appear."

The Bank for International Settlements warns that these arrangements make risks harder to see and points out that this web of obligations is built on expectations of future demand. If AI adoption continues to accelerate, this structure could self-reinforce.

But if demand disappoints, the pressure could feedback through the chain.

This could lead to vendors potentially losing orders and data center developers struggling to fill capacity.

At the same time, private credit funds may face pressures related to loans associated with software, infrastructure, or technology borrowers. Banks may find their exposure to private credit and non-bank finance more complex than the surface figures suggest.

This is why the warnings from the Bank for International Settlements extend beyond the realm of tech stocks. A decline in AI-related stocks would directly harm investors. A broader reevaluation of AI financing could tighten credit terms for companies reliant on the same financing environment.

Credit spreads have remained relatively narrow, reflecting investors' confidence in borrowers' ability to continue servicing debt.

A sharp repricing of equity risks could quickly change this. Once lenders demand more risk compensation, weaker borrowers will face higher refinancing costs, reduced capital access, and pressure to cut investments.

This is the pathway through which disappointment in AI could evolve into a macro event.

Bitcoin's Initial Reaction May Be Defensive

In this economic shock, Bitcoin's role will be complex, as supporters of this asset often describe it as a hedge against currency depreciation, fiscal pressure, and financial system vulnerabilities. Its supply is fixed, it has no corporate issuer, and it does not rely on corporate profitability or debt repayment timelines.

If an AI credit collapse ultimately forces policymakers to ease financial conditions, these characteristics may become more attractive. However, in the early stages of widespread sell-offs, Bitcoin may face the same pressures as other risky assets.

When liquidity tightens, investors typically first sell liquid positions. Bitcoin is actively traded, can be sold quickly, and is held by many investors who simultaneously hold stocks, exchange-traded products, derivatives, and other high-beta assets. This makes it vulnerable during portfolio de-risking.

Recent market behavior supports this concern. CryptoSlate recently reported that after South Korea's benchmark KOSPI index plummeted nearly 10% last week, Bitcoin fell below $63,000.

This decline indicates that liquidity conditions, leverage, and risk appetite can overshadow scarcity narratives for an extended time.

A market shock triggered by AI could follow a similar sequence. Tech stocks related to construction may decline first. As investors reassess the debts associated with data centers, vendors, and private financing tools, credit spreads may widen. Funds facing losses or margin pressures may then reduce their positions in cryptocurrencies and other liquid assets.

At that stage, Bitcoin does not need to have a direct connection to AI infrastructure to be affected. It only needs to be part of the same risk budget.

Liquidity Issues Follow

But the second phase depends on the government's response to the ensuing market disaster.

If the reversal in AI investments remains confined to a small group of tech companies, the damage may remain limited. Stocks may be repriced, vendors may adjust, and investors may reassess valuations without forcing significant changes in monetary policy.

But the risks flagged by the Bank for International Settlements suggest that the spending frenzy has been large enough to impact the broader financial system.

This implies that a significant retrenchment in AI capital expenditures could simultaneously hit corporate investment, employment, household wealth, and credit availability. If inflation remains high and central banks feel unable to cut rates quickly, these pressures could become even more pronounced.

This creates a difficult situation for risky assets. Higher inflation may lead to policy tightening while investment remains soft. Tighter credit could expose leverage in private markets. Falling stock prices could reduce household wealth and slow consumption. Each channel could reinforce the others.

For Bitcoin, the policy path is critical. When liquidity expands, real interest rates fall, and investors expect central bank support for the market, this asset typically performs best. Ultimately, credit shocks that lead to looser monetary policy could reignite that trade.

BitMEX co-founder Arthur Hayes believes that if authorities respond by recreating liquidity and investors move out of debt-laden financial structures, an AI collapse could help propel Bitcoin significantly upward.

This view remains speculative, but it captures why some crypto traders see AI capital expenditures and credit markets as potential driving forces for the next Bitcoin cycle.

But timing is uncertain. Thus, traders betting on a eventual liquidity response may still have to endure prior drawdowns.

Bitcoin rose 2.28% in the past 24 hours and currently ranks first by market capitalization.

Overall Market Conditions

The total market capitalization of cryptocurrencies is currently $2.09 trillion, with a 24-hour trading volume of $81.45 billion. Bitcoin's dominance is 57.97%.

Over the past two years, buying more Bitcoin has been enough to boost treasury stock prices. Strategy's BTC Yield is now declining, Metaplanet's market cap is below its holding value, and new entrants in Europe are asking investors to fund them on terms with no pricing.