A new Bloomberg report has flagged a troubling pattern in the artificial intelligence sector: circular financing, where startups and their investors essentially trade money back and forth to inflate revenue and valuations. The practice, which echoes the telecom industry collapses of the early 2000s, is now drawing attention from crypto investors who worry the same dynamic could destabilize digital-asset markets.
What the Bloomberg report found
Bloomberg’s investigation describes a loop in which AI companies pay for cloud computing services using capital from the same venture firms that own stakes in those cloud providers. The result is a self-reinforcing cycle of reported revenue that may not reflect real demand. The report warns that when the music stops — if funding dries up or a major player fails — the unwind could hit not just AI stocks but also the crypto infrastructure that depends on them.
Why crypto should care
Crypto markets are increasingly intertwined with AI. Many blockchain projects rely on AI-driven trading bots, data oracles, and GPU-backed tokens. If the AI sector’s growth is partly a mirage, the crypto projects built on that foundation could face a sudden loss of utility and value. The report doesn’t name specific crypto firms, but it advises investors to watch for signs of similar circularity in the digital-asset space.
History doesn’t repeat, but it rhymes
The comparison to the telecom bust is deliberate. In the late 1990s, telecom companies swapped capacity on each other’s networks to book revenue, creating an illusion of demand. When the bubble burst, it took down dozens of firms and billions in market cap. Crypto investors who lived through the 2022 contagion — Luna, Three Arrows, FTX — know how fast a house of cards can collapse when the underlying cash flows are fake.
What to watch for next
No regulator has stepped in yet, but the Bloomberg report is likely to put pressure on auditors and venture firms to disclose more about how AI revenue is recognized. For crypto traders, the immediate question is whether any major AI-crypto project has exposure to the circular deals. That answer may not come until the next earnings season — or until a sudden withdrawal freeze forces it out.
