CRYPTO AND AI PRESENT ECONOMIC RISKS

The crytpo and AI industries present serious risks to the U.S. economy. Crypto and AI may be economic bubbles that have the potential to burst with serious negative effects on the whole U.S. economy. Crypto is truly a Ponzi scheme. Both industries pose serious threats to the environment and are vulnerable to China’s dominance of rare earth minerals mining, processing, and subsequent use in manufacturing.

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The crytpo and AI industries present serious risks to the U.S. economy. Both have grown quickly and dramatically. Both are supported by risky financing and high levels of investor speculation. Both are industries that many people and investors do not understand well and that are largely unregulated, especially under the Trump administration. [1] (I’m not an investment advisor and claim no special knowledge, but, at best, investments in these industries are likely to be quite volatile. At worst, they have a quite high risk of loss.)

Crypto and AI may be economic bubbles. If, or perhaps when, they burst, they have the potential to have serious negative effects on the whole U.S. economy. They have features that are reminiscent of the housing and mortgage bubble of 2008 whose bursting created the Great Recession and almost brought down the whole U.S. economy (which was saved from far worse by massive government bailouts for large financial firms). Before that, there were the dot-com bubble bursting in the late 1990s and the savings and loan housing and mortgage bubble bursting in the late 1980s and early 1990s. Another historical economic bubble bursting was the 1929 stock market crash.

Crypto is truly a Ponzi scheme. There is no underlying asset. The only thing supporting the value of any cryptocurrency is someone else’s desire to buy it. Its only real value is facilitating get rich quick schemes, money laundering, and money transfers among criminals. The cryptocurrency industry is trying to transform its image from that of a scandal-ridden and crime-enabling financial technology (aka fintech) experiment into that of a mainstream financial and commercial investment and transaction vehicle. The Trump administration is doing everything it can to support this perception transformation without doing anything to actually clean up the industry – and while Trump is enriching himself, his family, and his cronies with crypto investment schemes.

The crypto industry’s nine-month stock market rally has been fueled by optimism due to Trump’s presidency and support, as well as by a shaky financial foundation built on huge amounts of borrowed money. On October 10, Trump’s statement about big tariffs on China sent the crypto stocks plummeting, 12% to 30%, reducing the value of crypto assets by $19 billion. (See previous posts on the risks of the crypto industry here and here.)

The crypto industry is dependent on lots of computer processing and massive amounts of electricity. The associated risks will be discussed more below in an examination of the AI industry, which shares these vulnerabilities.

The threats and promises of the artificial intelligence (AI) industry are widely discussed and debated. Its appropriation of copyrighted information without compensation or attribution, both to train its software as well as to answer questions posed to it, is the subject of multiple copyright infringement lawsuits. Its ability to create and disseminate misinformation and disinformation, including by amplifying it via fraudulent chatbots on social media, are widely recognized as a threat to an accurately informed public, and therefore to elections and societal cohesion, among other things. It’s also recognized as a threat to workers by automating jobs and displacing human workers. Its chatbots that serve as personal companions or mental health counselors seem to help some people and harm others. Their overall value and safety are widely debated.

Perhaps the most immediate threats of the AI industry are to our economy and the environment. The stock market values of AI-involved companies have soared based not on profits or even revenue, but on hype and hope. This includes Amazon, Google, Meta (parent of Facebook, Instagram, etc.), Microsoft, Nvidia (a computer chip maker), OpenAI, Oracle, and xAI (a Musk company). AI-related companies account for about 75% of the increase in stock market values this year, yet 95% of these companies aren’t making profits from their AI activities. The Bank of England recently warned that AI stock values may be overvalued and at risk of a sudden loss of value that could have global effects.

The building of AI-related infrastructure, including chip manufacturing and data and computing center construction, has represented 90% of capital expenditures in the U.S. A good portion of this is taxpayer subsidized, not just through federal tax breaks, but hundreds of millions of dollars in state and local tax breaks for building facilities in at least 37 states. And, as with the crypto industry, a good part of this growth is built on a shaky foundation of borrowed money.

The data and computing centers required by both AI and crypto need large amounts of electricity to run them and large amounts of water to cool the computers. The availability of both electricity and water may be a constraint and will require large investments in public infrastructure, e.g., electricity generation and distribution. For example, as you may have heard, Microsoft is planning to reopen a Three Mile Island nuclear power reactor to provide electricity for its data processing centers. (As you may remember, Three Mile Island was the site of the most serious accident in the U.S. nuclear power industry, a partial reactor meltdown in 1979.)

Another vulnerability of both the AI and crypto industries is the need for chips and other electronics whose manufacture requires rare earth minerals. China is responsible for 70% of the mining of rare earth minerals, 90% of their processing, and 93% of the manufacturing of a key product. This is why Trump’s threat of tariffs on China and a possible trade war with China dramatically affected AI and crypto stocks. If China were to deny the U.S. AI and crypto industries access to rare earth minerals or the products that use them, or even increase their prices significantly, it would be a very serious blow to the companies. This in turn would be a very serious blow to the whole U.S. economy. [2]

The Trump administration has further weakened or removed even the weak regulations and restrictions that were in place on crypto and AI. Moreover, it has been opening the door to investments in crypto and AI by pension funds, individuals’ retirement and savings accounts (e.g., 401(k)s), and banks and financial institutions. This exacerbates the negative impacts of a serious downturn in either industry.

Economic bubbles typically make a few people rich, sometimes very rich, but many people lose money, sometimes lots of money, when the bubble bursts. If the overall threat to the economy is bad enough, the government will step in and provide a bailout, usually to the larger entities that often were at least partially responsible for the bubble. However, millions of Americans could lose their jobs, and, if they or their pension plans had been lured into investing in crypto, lose significant chunks of their savings.

For lots of good news see Jess Craven’s Chop Wood Carry Water blog here and here.

[1]      Reich, R., 10/14/25, “Beware the oligarchs’ two bubbles,” Blog post (https://robertreich.substack.com/p/beware-the-oligarchs-ai-bubble)

[2]      Dayen, D., 10/14/25, “Why China can collapse the U.S. with one decree,” The American Prospect (https://prospect.org/2025/10/14/why-china-can-collapse-the-u-s-with-one-decree/)