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How Long Will the AI Boom Continue? The #1 Question for Crypto Investors | Michael Nadeau
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- [00:00]
Michael Nadeau
Foreign
- [00:04]
Ryan
nation, a relevant topic for crypto investors at the moment? I think actually the most relevant topic, the most important question for us right now, how long will this AI boom continue? Are we in an AI bubble? What's going to be the outcome for our crypto assets? I have Michael Nadeau from the TDR podcast and the TDR research on the episode today, and we're going to discuss this. Mike, how you doing?
- [00:28]
Michael Nadeau
I'm doing great. Ryan, how are you?
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Ryan
I'm doing great, man. Hey. This episode really came from a discussion that we were having after we were done recording the TDR podcast last week, and you showed up this slide, which was Bitcoin versus nasdaq. The correlation by year. You said that crypto has never been more correlated to the NASDAQ than it is right now in 2026. And we see right now crypto prices, we're kind of being pulled upwards, it seems, by an incredibly strong tradfi market. In particular, tech stocks have been booming. So is it like up 25%, the Q. Q. Q. Since the. Was it March or April lows?
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Michael Nadeau
Yep. Yeah, it was like March 30 lows or so. Yep.
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Ryan
I mean, so all of this led me to believe in our discussion, we were talking about this. It just seems like crypto is being pulled up by the stock market, by the AI trade, specifically by the nasdaq. And so if that's the case, if our future, at least right now in this current regime is dependent on the AI boom, I think the most relevant question for us is like, is that going to continue? How long will the AI boom last? And you prepared some materials to help answer that question, or look at, let's say, both sides of the equation here. But let's start there. I mean, do you think that is the most relevant question for crypto investors right now is kind of, where's AI going to go?
- [01:57]
Michael Nadeau
Yeah, I mean, you know, we. We're mostly focused on the crypto markets, and the crypto markets have been in. We. We believe we're in a bear market on the crypto side. And really, the. The error has come out of these. These markets. We've seen this rally from Bitcoin since early February, which has corresponded with a major rally also, you know, in the NASDAQ over this period. There was some disruption in the NASDAQ prior to the big rally. We started in early April. But, yeah, I think if you're focusing on crypto right now, there's sort of like a narrative that's going that we've already bottomed and that we're going into the next bull market. And while this is playing out, we have, you know, an extreme sort of situation happening in NASDAQ and kind of the AI sector. And there's a lot of discussion around, is this a bubble? Right. This is the big. The big question right now. And if it is a bubble, what does that mean for crypto markets? And that's kind of the question I've been asking, and why I'm doing some of this deeper research on the AI side of the equation right now and just trying to have a view on if that is actually sort of in the ninth inning of potentially this bubble scenario, which nobody knows. It'll be obvious in hindsight, but. But nobody can predict this stuff.
- [03:11]
Ryan
I guess there's so many, I guess, mixed feelings when people use the word bubble. Some people say we shouldn't use it at all. It's kind of meaningless. What does. What. What is a bubble, actually? Others say, you know, you can use the term bubble. And by the way, bubbles are good. Somebody by the name of author by the name of Bern Hobart came on the Bankless podcast. He has a book called Boom, talking about the value of bubbles historically throughout history. Others use the term bubble as almost an insult, and they sort of have negative connotations when it comes to a bubble. So it's another way to look at it. Yeah, let's maybe be precise on the definition of bubble as we're going to kind of use it in today's episode. So when you think about a bubble in markets, what does it actually mean to you? What's the more objective perspective on what a bubble actually is?
- [04:02]
Michael Nadeau
Yeah, and like you said, this is all, you know, everyone has their own definition and kind of when you're entering or exiting these periods, this is kind of how I think about it. You know, there's typically a breakthrough technology, Right. This is kind of through the framework of Carleta Carlotta Perez's book Technological Revolutions and Financial Capital, which is a fantastic book to read right now, I think, in. And how it's relating to what's happening in AI. It's a book that I was very focused on trying to understand how that's actually impacting the crypto markets and the, you know, the crypto bubble as well. But you always have this. This introduction of a new technology that really captures people's attention. And there's usually broad acceptance, you know, that this thing is real. And we start to see, you know, a narrative start to form around how this is going to Impact the future of business, the future of productivity, the future of efficiency, new new business models, you know, different disruptions to various sectors of the economy. And so this starts to get baked into the sort of the, the psychology of the market, the narratives within the market. And if you start to see some interesting growth behind that narrative, which we are absolutely seeing on, on AI, we've seen the new models that are coming out. Each one is stronger than the last one. The earnings of some of these companies, we've seen anthropic reporting, just the growth in revenues that they've seen. So now, you know, this sort of narrative that's already gotten kind of baked in is now being validated by growth and the numbers. So now you have sort of this reflexive movement on top of that. I think we're in that phase of this, you know, right now. At some point, typically you, you get like the valuation detachment and, and that's when, you know, maybe things start to get a little bit more wobbly. We can get into, we're going to get into some, what's happening with, with the data out there. What's interesting right now is there's a big discussion around these growth figures and, and analysts are reporting, you know, forward, forward growth is continuing to tick up for Q1, 27 earnings growth, which is just an incredible, incredible number. When you factor that into the price of the assets. The price of the assets can be rising very fast, which they are. But if your, your earnings growth is rising in line with that, then the PE ratios aren't blowing out the way, you know, you might expect. And investors can sort of, you know, kind of validate a bull thesis even when, you know, valuations are really high. So we're seeing some of that start to play out. And this tends to happen with, you know, easy capital, lots of leverage, lots of fomo. And the narrative just usually gets stretched too far and we tend to overbuild. This is just something we've saw. We've seen this in the crypto markets. You know, a new technology comes out, it looks like it's going to be a breakthrough technology. And then you have all these copycats rush in and they start building. There's tons of capital gets thrown at that sector. You tend to overbuild the capacity. We saw this in the dot com era, which we're going to get into today. And that's the big question, you know, at what point does sort of this expectation of future growth, at what point does that story start to roll over and we can kind of get into the data, the narratives, what we're seeing and all of the things and how this looks similar and also different from what we saw back in 1999.
- [07:30]
Ryan
Okay, I guess the way you are grounding then this bubble word is through the lens of Perez's framework, who talks about in particular technology revolutions and how they go from kind of this eruption phase to a frenzy phase to sort of a turning point phase, a synergy and maturity type phase. And you've seen, I'm sure, and listeners will have seen bankless, listeners will have seen the hype cycle, kind of this famous graph. It's really the exact same thing that Carleto Perez is talking about. Right. Where the have kind of this trigger period, you have this inflated expectation horizon and that's the top of the bubble. And then you have a deflation trough of disillusionment, slope of enlightenment, plateau of productivity. And it kind of goes on. And every major technology revolution has this. I mean, crypto has had maybe four of these, maybe five of these. The Internet had this, the radio had this, electricity had this. I think Perez talks about railroads in particular automobiles, 1800s automobiles. Some industries have multiple of these kinds of cycles, but it's very clear that we're in one. The problem is you don't know where exactly you are on the slope here.
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Michael Nadeau
Yeah, exactly.
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Ryan
Like, how close are we? Because for any major technology revolution, I mean, it seems like if you believe Perez's framework, and there's no reason not to, it seems to be almost always the way this plays out. We're going to hit a top at some point. There's going to be a period of time where expectations are just discordant with the reality on the ground. And we get way over our skis on this. We just don't know when that's happening. Right. And when we're in it versus when we're kind of like traveling up it. Because there's no timeline really on the axis here. It's like that's the unknown part, is how steep is this curve.
- [09:37]
Michael Nadeau
Yeah. And there's so many factors, you know, that play into this. What's happening, you know, broadly in the economy, what's happening with liquidity conditions. You know, there's what's happening, you know, on the political side of things and, you know, regulation and where that's going. So there's many, many factors. And I think that's why it's just so hard to predict, you know, how, how things are going to. Going to shake out. And we're not trying to like call the top or anything in this episode. We're really just kind of laying it out to then say, okay, you know, how should we be thinking about this? And we'll get to that at the end. But, yeah, I think, you know, I think this is the right framework. And we're clearly in, you know, we had the eruption period. I think you could say that that was, you know, ChatGPT coming out back in late 2022. There was obviously a lot of work that went into AI before ChatGPT was released. But that was kind. And I think, you know, you can make an argument that, you know, 24, 2024, 2025 have been sort of the frenzy periods and where it feels to me like we're. We're really pushing into like, maybe later stages of that frenzy period.
- [10:39]
Ryan
Later stage frenzy. We're definitely in frenzy. Later stage, frenzy possible, but who knows how long the. The later stage could actually last? You know, Nate Silver has an interesting tech model for this. In his book, too, he talks about each technology having kind of a different order of magnitude, almost like a technical Richter scale. And sometimes you have like a, you know, a six. That might be a technology like the mobile phone or something like that. Maybe the Internet was like a seven or an eight. Maybe AI is a nine. We don't know. We don't know if it's a six or a seven or an eight or a nine. Or how world shaking is this actually could be. And so we don't know the slope of the line. We don't know how long the frenzy period will actually last. Could be months, could be years. And it all depends on what this technology is actually able to deliver. Let's take a look at some of the data, because I'm hearing different investors right now say different things. Famously, Warren Buffett, he had some clips last week saying, you know, he's been in the market for 60 years. There's only in five years, at which point he thought the market was cheap enough to buy. Right now, he said, it's kind of operating a bit more like a casino. And Berkshire Hathaway is stacking cash they've sold into this market the last few years. They've been net sellers of stocks. And then he'll look at probably a metric like this, which we have on the screen, which is the Shiller PE Cape ratio. Let's talk about some of the data and try to get to a sense of how valued the current equities market actually is. So what does the Shiller index tell us?
- [12:20]
Michael Nadeau
Yeah, this is the Shiller Cape ratio. So this is giving us like more of a view of the cyclically adjusted, you know, PE ratio. So it's taking the average of the last 10 years and it's adjusting that for inflation. So, you know, it's trying to strip out like we just had this period, you know, where Nasdaq went up 25% or so over like five weeks. So it's trying to average that. It's not, it's not giving too much weight to like what's happening recently. It's trying to average that out over the last 10 year period. And so, you know, right now when you look at that chart, we're at 42 or so. We're very, very close to where we peaked back in 99, which was right, right over 44. We are well, you know, north of where we were back in 1929. And we also, you know, beef means higher.
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Ryan
Right. So 1929, we peaked what this looks at like 33 or 33 or so.
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Michael Nadeau
Yeah, yeah.
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Ryan
And right now we're 42.
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Michael Nadeau
We're at 42. So we're well past that. I mean, this people were pulling this chart up also back in 21 where we had a big rally and we got to about just under 40 back in, in 21. So we're clearly like, just from a very high level. Like, we're clearly at these like very elevator levels. Just from very high level.
- [13:38]
Ryan
Oh my God. So the only time in history Shiller PE has been higher was in the year 2000, basically the dot com boom. And it was only mildly higher at the time, 45 or something rather than 42 right now. And remind us what Shiller Pe is actually telling us. It's a ratio of price to earnings or it's some sort of index of price to earnings, inflation adjusted.
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Michael Nadeau
It's. Yeah, it's the PE ratio of the S&P 500 based on, you know, averaging out the last 10 years and adjusting for inflation. So when I look at this, I'm
- [14:12]
Ryan
just like, how do you buy, how do you buy in this, into this market?
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Michael Nadeau
It's tough. I mean, you know, this is the, this is the big question. We've obviously seen a lot of disruption, you know, within the technology sector as AI stocks have outperformed. We've seen SaaS stocks. You know, there's bear markets happening at the same time, which is, which is sort, which is sort of interesting. But from a broad perspective, we're clearly in sort of what you might categorize as a bubble territory is it safe
- [14:41]
Ryan
to say that when you look at this, you have to come away with a conclusion which is stocks aren't cheap right now. Can you say that?
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Michael Nadeau
I think so. Yes. I think that's correct. Yes. And that also means that if stocks are not cheap, then your forward returns are not great. If you buy stocks when the PE is over 20 or so, there's a lot of evidence to suggest that your 10 year returns aren't going to be that great from those levels.
- [15:06]
Ryan
How about revenue growth forecast? That's another dimension of this.
- [15:10]
Michael Nadeau
Yes. So this is, I think, you know, this is an interesting thing to show here because I think the big narrative and I think this is one of the things to really be paying attention to right now are what are the narratives, what are the primary narratives from the bull side of the equation and do those line up with what the data is showing? And so I think one of the big narratives out there is that well this is a little bit different today because from, from a few perspectives. One, the companies that are financing this build out the big hyperscalers, these are extremely profitable companies. They're well capitalized. They were using free cash flows to, to, to. To build out the capex up until more recently. Now they're doing some debt financing. So I want to understand like is it true that. Okay, yes, earnings are really strong and forward earnings are really strong. This is true. And this chart, chart shows that. So even just looking at Q1, this is a blended growth rate for Q1 because not all companies have reported earnings just yet. So it's blending what analysts had expected for Q1 plus actual actual reporting. And we're at 27.7% right now. The big narrative is that this was not happening back in 1999. That is not true.
- [16:31]
Ryan
So wait, wait, the big narrative is that in 1999 we had a bunch of fluff, unprofitable companies. Pets.com no business model, substance. You just had to launch a dot com and then you could raise billions of dollars. But there was no revenue growth underlying it really and certainly no earnings growth underlying it. Now this time it's different. There is earnings growth. We're seeing this in the earnings growth forecasts and the current reporting from equity companies. So this time is different from that perspective. That's the narrative.
- [17:08]
Michael Nadeau
That's the narrative and I think it's sort of lazy because a lot, I think people are looking, there was a lot of fraud. There were the pets.com and just like these domains that popped up and didn't really have a business model and got really high valuations. So that is true that that did happen. But what's not true is that earnings estimates were ramping up the same way that they are right now. So we were. The earnings estimate in Q4 of 1999 was the same as it is today. So there was actual, like the companies that were financing this were, they weren't the hyperscalers that we have today, but it was kind of similar. It was the big telecom companies, it was AT&T and Verizon and they were spending, they were the ones spending the money. Those were profitable companies. They were ramping up everyone, their earnings were looking fantastic. And so it was a very similar setup where the valuations were, were ramping up aggressively, but so were the earnings estimates for future forward earnings. So it's, it's the same exact thing that we have going on today. Yes, you had all this extra froth in pets.com these other things, but the actual companies were strong that were actually financing this and they were reporting really strong earnings at the, at the same time. So this is like, you know, this is a little different from what the narrative is out there. And you can see, you know, we have some notes just on the side here. So we're at 27.7%. Just to give you an idea of how high that is. The 10 year average is about 10.3% in terms of earnings, earnings growth estimates. The five year actual is 16.4%. So we've been in a period here where we've been above average and that just keeps ramping up. And you know, again, same thing happened back in, in, in 99. We were at the same level of expected earnings growth in Q4 of 99, which was right before the peak. It actually went up a tick higher in Q1 of 2000, up to 32.7% in Q1. And then when you talk to people that were in the markets at this time, we were, you know, I was, I was not, not an investor and, and not even old enough to be participating in the markets at this time. Yes, but a lot of people say like, you know, what broke it was there some catalysts like how could that, how could it just break because earnings were so strong. You know, people's people will tell you like it's not a good idea to just wait for these quarterly earnings to come out and then just be complacent because it looks good. Because there wasn't really much that, that broke it at the time. It just kind of started to roll over and Then the narrative start to shift. So it was really price that led, not fundamentals. And I think that's the most important takeaway. This is something we focus on in the crypto markets, that price leads fundamentals. And we see the same thing also happen with crypto investors where you get into a bull market in crypto on chain activity, peak, you know, ramps up, the chains start to. You can. The price of sales ratio of like Solana was coming way down as the valuation was going way up last cycle. Right. So if you start to extrapolate that out, you can tell a story about why this valuation makes sense. But you're using like the, the peak sort of activity on chain to, to, to extrapolate out. The question I have is like, okay, if, if these are real earnings, right, we're not saying they're not real earnings. The question is like, can you, can you extrapolate out from there? And we'll get into like, where is all this coming? We've got some flowcharts to show kind of where the money is flowing through.
- [20:40]
Ryan
That's a really subtle point and a really important point as we look at these markets. Let's grab some more data though, before we come to some conclusions here. So here's a chart of forward PE ratios. There's another chart of S&P 500 forward profit margins. What are these data sets adding to our story?
- [20:58]
Michael Nadeau
Yeah, so the, the forward PE ratios, right? Now if you look at like the MAG7, it's, you know, 26.7 or so. If we look at the large, large cap, S, P500, we're about 21. So this is not like insane. You know, we've seen higher valuations and the reason is because the E is just going up just as much as the price. Right. We, the. If the earnings keep. Keep going up and the, and the price is going up at the same time, you know, the ratio is basically going to stay flat. So.
- [21:30]
Ryan
I see. So this is a breakdown of forward PE ratios again and showing there's these vertical bands, I guess, indicating down markets, bear markets, maybe recessions, I'm not sure.
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Michael Nadeau
Yeah, so the, yeah, the pink ones are S&P 500 bear markets and the blue ones are corrections. So corrections. 10% bear market, 20%.
- [21:54]
Ryan
All right, very good. And the breakdown, the reason we have different lines is there are different segments of the S&P 500. So you got Mag 7, you've got large cap, you've got mid cap. They actually have S&P 600, some small cap as well. And so you see kind of, you know, I guess different indicators here now on this chart. Different than our Shiller PE on this chart we're actually not seeing all time highs, I guess, I guess for Mag 7. Mag 7, it's doing pretty well. But it was higher in 20, 20, 21. Is that right?
- [22:29]
Michael Nadeau
FORD P. That's right, that's right, yes. Okay. Because the earnings weren't as strong in 21. That, that's the key. Here is the earnings.
- [22:35]
Ryan
I look at this chart and I don't see anything like it doesn't look crazy. I mean the, the Shiller PE looks crazy. That looks like you're buying the top. If you're buying right now, this doesn't look that bad. And you're saying the reason is because earnings are really keeping up. Like the earnings are actually being shown in the, the reports and in kind of the financials right now.
- [22:57]
Michael Nadeau
Exactly. And so if you're bullish and you're saying this is not a bubble, like look at these earnings. Valuations are not, you know, we're below, we're significantly below where we went, where we were in 21, you can sort of make the argument that hey, look at, look at all these earnings. Like this is not a bubble. This is just like, you know, the market's just really hot and this technology is incredible and all these companies are implementing the technology, they're spending. So you can make the bull, the bull argument, I think, based on, based on this, the question. But going back to what we were just talking about, what is the leading indicator? If you're focusing on earnings and you're waiting for it and you're gonna, you're gonna say, okay, well I'm bullish. All the earnings reports are coming out really strong right now and I'm gonna just wait until Q2 on that. Like that's the, that is the key thing is like are the, is price following fundamentals or are fundamentals following price? And that this is the, this is really, we know in crypto it's price that, that is a leading indicator.
- [23:54]
Ryan
I think probably in all hype cycles, Res framework frenzy territory, price is going to lead and then fundamentals are going to follow. Right, that's probably going to be true here. I know you've got some slides where we're going to look at the particulars of, of how that might work in this market.
- [24:11]
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- [26:24]
Michael Nadeau
Not.
- [26:25]
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And as always, this is not investment advice.
- [26:27]
Ryan
Let's get to this. S&P 500 forward profit margins. Is this a similar story?
- [26:33]
Michael Nadeau
Similar story. So again, this feeds the narrative of the power of AI. You know, it's, it's creating efficiencies, it's creating productivity, it's driving these, you know, forward margin margins are rising. So we're at about 15.3% right now. That's the highest, you know, we've been since, in the history of this chart going back to 2004. Again, this was also true back in 1999 where margins were actually rising as well. And we got up to about 12.2%. So not as high as, as, as we are today. But it just, this chart's here just to show that, you know, if, if you're making the bull case. This is part of, this is part of that margins are improving, earnings are improving.
- [27:18]
Ryan
This looks like a, a bull case could be like, this looks like the AI boom, productivity miracle here, right? Yeah, we increased margins for everybody because AI is automating things away. Right.
- [27:28]
Michael Nadeau
And the question I have on this piece of it is like, we haven't really seen any studies or at least I haven't seen any studies on the companies, the S&P 500 companies, the large enterprises that are implementing OpenAI and they're implementing anthropics enterprise products. They're spending a lot on this right now. We have not seen a study come out to say that, you know, showing that they, they know for a fact that the spend that they're putting in there is, is equating to two employees. Right? That's basically what this has to do if this is going to be durable long term. Is all of that spend like, if you think about a large insurance company or something, Travelers Insurance is implementing this internally into their systems right now. A massive company spending a ton of money. Most of that's going to the companies like Anthropic. Now what could possibly slow down the spend that they're putting in is like if they start to do study, they start to say, well, wait a minute, is we're spending like crazy and we feel like we're just in this rush to do it because everyone else is doing it. What happens if the studies show that maybe the ROI is not as good as they thought it was going to be, or like that.
- [28:48]
Ryan
But isn't that getting priced into this? Like, you know, if I'm looking at forward profit margins, isn't that basically showing what you just said, that, oh, these companies must be adding AI, incorporating AI and becoming more productive, becoming more profitable? I mean, if it was costing more than it kind of like brought in, you'd see margin compression, wouldn't you?
- [29:07]
Michael Nadeau
Yeah, you should. We, we. Yeah. So if the margins are increasing, it's a good thing. We just don't know if that's like 100% driven by AI. We don't know exactly what's, what's, what's driving that because like I said, I haven't, I haven't seen the studies. I think we're, we're, we're kind of in the process where this is starting to be implemented, but I don't know, like, at what scale it's like, really impacting it. It's. We know the margin improvement, we just don't know. Like, it's not clear to me if that's like, definitely AI just yet.
- [29:35]
Ryan
What else would it be?
- [29:37]
Michael Nadeau
I don't know. I don't know. Not hiring. We haven't seen really any hiring over the last year. So if your revenues are growing and you haven't hired, your margins are going to improve.
- [29:47]
Ryan
There isn't part of the bullish story that they're not hiring because they're able to backfill with AI. I mean, you look at kind of like some of the layoffs that we've seen. Even crypto coinbase laying off 14% of its workforce. Brian Armstrong says we're doing this because of the cycle and also, and, you know, trading volume down, all these things, and also because we can, you know, replace some of these jobs with AI, effectively. That, at least is the narrative.
- [30:13]
Michael Nadeau
That's the narrative. I think there's definitely probably some truth to this, but I also think it's kind of a. You can, you can use AI. Maybe Coinbase was going to have to do layoffs anyways, and then they can say, well, we're restructuring our internal systems around AI and stuff, and we think this is going to be the way to do it. So I think there's probably a combination of productivity and it's an excuse. You know, they can sort of say, hey, we're going into a new world and we're Implementing AI. So we'll see. Like, to me, I don't know. I don't know. I think we need to, we need more time on this to know for sure. But when I think about, like, what would, if you were trying to figure out what would sort of change the narrative, I think it would be something like this where people start questioning the spend and whether or not there's real, real ROI on the other side of that. For me, as somebody, you know, running a small business, it's, it's definitely making my life more efficient. And I can see a path where we can just do more and not have to hire behind.
- [31:10]
Ryan
I think that's the same. The same for me is I see it in spots sometimes, but I don't always see it. And I'm not sure how much like I can actually automate in the things that I do day to day versus how much I'm just kind of spending tokens. And it's not leading to actual productivity gains and kind of revenue increases. Anyway, let's continue this story. So the short term looks frothy, of course. So we have a 26% move on the NASDAQ over five weeks. So I mean, that's, that's. You say this is historic. Historic 28 day trading. Trading day. This is.
- [31:49]
Michael Nadeau
Yes.
- [31:49]
Ryan
Has this ever happened again?
- [31:51]
Michael Nadeau
So trying, you know, this is just me zooming out, trying to put this in perspective. Like, you know, how many times has this happened in history and like, what were the circumstances that it happened? It's happened a total of eight times going back to 1971. And if we kind of just go through these. So back in 1991, we had a 26% rally over a similar number of days that was after that was coming out of a cycle low. So I'm trying to understand like, what was the context of these rallies that was out of a cycle low.
- [32:23]
Ryan
So that wasn't a technology revolution, that was just cycle lows, recovery, basically recovery
- [32:28]
Michael Nadeau
rally, basically mean reversion rally. And we had another one in 1998. So this was kind of like early, earlier in the kind of like AI bubble. This was also coming out of a correction. So kind of early cycle move back in, back in October of 1998. And then we had the big late cycle melt up October 27th. This was Q4 of 99. That was a 28% rally. That was the late cycle kind of melt up. And then you had the bear market rally in, in January of 2000. 30% rally. That was kind of, you know, coming out of out of some of the lows and, and we had another one, another bear market rally in 2001. So now you're in, you're in the sort of like wealth destruction phase and you're getting some of these kind of bear market rallies. And then the other, the other two were coming out of the lows from 2009. And then we had the big sell off, Covid sell off and we had a big rally, a V shaped rally coming out of that. So the takeaway for me I think is just these tend to happen like coming out of like a mean reversion after a correction is like one way these tend to happen and then they tend to happen at like the top. Right. So possibly, possibly that's where we are.
- [33:47]
Ryan
So okay, so as I look at this chart, this is really fascinating. All of these are mean reversions after cycle lows except for the three that happened during the tech revolution of dot com. 1998, you said a plus 32%. 1999, December a plus 28% and then the final blow off top in March of 2000 of a 30%. So there were three, there were three in dot com.
- [34:18]
Michael Nadeau
Yeah, yeah, that's true. Yeah, yeah.
- [34:19]
Ryan
So like this could be, I don't know, the first or the second.
- [34:23]
Michael Nadeau
Early. We could be early. That's, you know, that's the challenge. I think that's the, this is the challenge. We could see another 30% move. You know, we maybe we have a little 5% correction and then another 30% move. I think this is the, this is the, this is the challenge of being in a, in a bubble. And I think if you're a trader, you probably love this, right? Traders probably. Like this is more volatility there. You can make, you know, kind of short term bets and I think if you're a long term investor, it's a little bit trickier to navigate. But yeah, I mean this is kind of the, I guess the, if you zoom out on, on this, it's to me it's either the final blow off or it's just like we're in the final blow off and maybe we have another one.
- [35:04]
Ryan
So guys, we could either be in 1998, 1999 or 2000. We're not sure. We're not sure, but we're in one of those probably. And it probably is going to. Because of it's a technological change, it probably is going to blow off top. I mean that's pretty much a given at some point in time. Whether it's this time or the next one or the one after. Concentration levels. This was a fascinating metric. I saw this all over my timeline on Twitter. So peak concentration levels of major bubbles. Anytime you get over 40% of what, some sort of concentration metric, I guess when you had the Nifty 50 run was that in the 1960s you had 40%. Nifty 50 were 40% of the market. When you had Japan going crazy in the 1980s, it got up to 44% of the total world market. When you had railroads back to the 1800s that got up to 63%. That was the mother bubble of all bubbles. Right now we're at 40% and that's measured by the big 10 AI companies as a percent of S&P. They dominate. They have 40% of the S and P. When I look at this data though, I can't tell if they're just kind of picking some data sets to tell a concentration story because these aren't really apples to apples comparisons. But what do you see when you look at this?
- [36:27]
Michael Nadeau
Yeah, this is really just like a high level to understand the concentration in the market, how that lines up with other periods where there were bubbles. And we've known this has been going on for a while. The Mag 7 really led most of this rally. What I'm starting to pay a little bit more attention to now is, you know, we've seen, we saw this about 12% correction or so and NASDAQ in March and, and we've seen the big 25% move coming out of that over the last five weeks or so. What's sort of interesting to me is that MAG7, there's like, there's not like full leadership amongst MAG7 in that move back to all time highs. So only four out of the seven, so it's still, still more than half of them are now back to all time highs. But, but you still have a few of them that are not participating. When things broke down back in 1999, that's kind of what it looked like as you had like this broad, you know, leadership amongst the winners and then like a few fell off and then a few more fell off and then there was like one that was still like kind of everything was concentrating around. So I'm kind of paying attention to how Mag7 is performing. We've got a chart in here just showing like equal weight and this is not back to all time highs of the S&P 500, which is interesting because the S&P 500 is back to all time highs and it's sort of Showing you that there's not like broad breadth, broad participation. So last Friday The S&P 500 closed 7.7% above its 50 day moving average. But only 52% of the components of the S&P 500 finished above their 50 day moving average. In the past 30 years the S&P 500 has never had fewer than 55% of its components above their 5050 day moving average when the index was at least 7% above a 50. So it's kind of just, you know, it's a little odd that the index is, is back to all time highs. But Mag 7 not all of Mag 7 is not and you're not really getting this broad participation from, from the rest of the market which tends to align with kind of bubbly type periods in the past.
- [38:38]
Ryan
I see. And I guess that's because the leaders, the ones that are pulling ahead, are embracing more of the narrative story and kind of the price story as well, the story around AI exuberance that the market really wants to hear.
- [38:54]
Michael Nadeau
And like of late we can go to a few of these stock charts. I mean Just looking at SanDisk, some of these memory stocks.
- [39:00]
Ryan
Oh that's true, yeah. Into intel from April 1st up 200%. Intel.
- [39:06]
Michael Nadeau
Intel is a big business. This is not a, intel has like
- [39:10]
Ryan
traded flat for like 10 years or something, hasn't it?
- [39:12]
Michael Nadeau
Right, right. So you know they're, this is a big business. It's not a penny stock. It's up 200% in five weeks. That is, that's a huge, huge move. The memory stocks we've been seeing just absolutely rip as well. Like SanDisk is up 540% year to date which is pretty, pretty wild. You know we've seen Micron, another memory stock, you know, up 130% or so since April 1st. So you know these are, this is where the bubble is starting to concentrate in different parts of the AI stack. We've seen Mag 7 a little bit, you know, less participation there and you know the rest of the market is kind of lagging, lagging behind.
- [39:55]
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- [41:47]
Ryan
Let's talk about in more detail maybe the mechanics of today versus the, the dot com bubble. So when you look at the AI money flow today, where is all of the money coming from? I mean it starts with demand, doesn't it? Like your demand for tokens, AI tokens, my demand for AI tokens. Large companies demand for AI tokens in an interface like Claude or ChatGPT or some agent somewhere. That's where it all starts. And then what happens?
- [42:21]
Michael Nadeau
Yeah, so you know, all that demand, you know, And I think 80% of anthropics revenues are enterprise revenues. So almost every major company is integrating AI into their systems. They're doing this, you know, they're not just using these things, they're, they're integrating that inside like a sort of walled garden within their, their businesses. But basically what I think is happening is everybody is rushing to integrate this right now. They see the, the potential for this technology and how it can help them improve margins, improve Efficiency. So everybody's rushing in. That's, you know, subscriptions, APIs, software, all that's mostly flowing to the, the models and the application layer. That's open AI, that's, that's Anthropic. That's perplexity. So most of that's going into those companies. These are the, this is where things are, get interesting. Those are the businesses that are not profitable. Right. We, we know that Anthropic is scaling revenues aggressively. I can't remember what the latest that they reported is, but it's a, it might have been a $30 billion, you know, annual run rate that they've already achieved, which is, which is incredible. But they're not.
- [43:33]
Ryan
I think I've got some numbers here just to take a peek at. Like, look at this right here. Anthropic's extraordinary rise from December 2022, 10 million in revenue all the way to May 2026. This is annualized revenue. We went from 10 million to 45 billion on this chart. This is log scale.
- [43:54]
Michael Nadeau
Okay, yeah, yeah, that's an insane ramp. All right, so this is like, this is feeding the narrative right there. Everybody is plugging into them right now. And so that's, you know, that's where the, the cash is going. They are spending on the hyperscale, right? So then they are spending money with the cloud providers, right? This is Google, this is Amazon, this is, this is meta to some extent. So that is going there. So then when those companies report their earnings, everyone's like, oh my God, look at all the, look at all the revenue that, that they're producing. They are also, there's a little bit of like a circular thing going on where some of those companies are, you know, investing in OpenAI and anthropic and then they're paying them, you know, revenue. So there's a little bit of a circular thing going there.
- [44:41]
Ryan
And I just saw what's it was it last week or the week before, you know, Anthropic was basically out of compute and X AI had over provisioned Elon, made all these data centers. But their model wasn't as used as Anthropic. And so Anthropic cut a deal with XAI to just tap into their, their hyper, hyperscale resources. So they have the compute. So there's a lot of allocation, let's say to the leading apps where the demand is actually taking place.
- [45:10]
Michael Nadeau
Interesting. That's really interesting. So, yeah, so right now like the demand is there, I think is very clear. The demand is there. So if we Just keep following this. So then the hyperscalers, right? Where is their cash? They're spending on chips, right? Nvidia data center build outs. So then the capital's flowing, you know, to, to those types of companies. What's Nvidia spending its money on? It's spending its money on tsmc, all the things that go into those chips. Most of that capital, I think is leaving the, the US and going to like Asia where, where a lot of those chips are manufactured. So this is like the kind of the, the flow of capital and it all starts that the, the only thing you really have to understand here is like that this first step is the demand. And where is that coming from? I think every time a new model comes out, we just, you know, Mythos came out, kind of blew everyone's expectations away and then that maybe creates even more demand for, for the next new model. So as long as that stays there in this sort of FOMO driven like race to implement these solutions internally within these large businesses, as long as that's there and they feel like they're getting ROI on that, that I think this can continue. But it's sort of a Goldilocks type setup where like, what if there's a disrupt, you know, we know there's other risks in the economy. What if China comes? We know China is building out lots of these models. What if they introduce a model that just is way cheaper, you know, to use than some of the stuff that's already out there? So you know, you just got to kind of think about like, what would break the demand. Is there some change in the technology that could potentially come? Is there some unexpected thing with return on investment that people aren't projecting that would, you know, potentially reduce some of that demand at step one? And then that's what would make the sort of Capex investment and everything else look like it was getting frothy and maybe overbuilt. I don't think we have signs of it being overbuilt just yet because the demand's there and there's like so much demand for the compute itself that there's no, like, I don't think there's a glut of supply here just yet.
- [47:23]
Ryan
The demand is there because the models and their capabilities just keep on getting better. Like I'll tell you, just my own experience. So a year ago at this time, I was probably subscribed to maybe two models, $20 a month. So my spend was, you know, $40 a month. Let's say now you fast forward to today. Over the past month or so I probably averaged about 50 bucks a day maybe in terms of token model spend. And that's just because the tokens have become more valuable for the research and work output that I'm producing. And so my demand has continued to ramp up and it will continue to ramp up until I, they stop being as useful or I suppose they get a lot cheaper. So I'm sure that's just a microcosm of what every person is doing, every company is doing, and it all depends on how useful these AI tokens actually continue to be.
- [48:23]
Michael Nadeau
Yeah, I agree. And then, you know, what's the next phase of demand potentially? You know, we should start to see more sophisticated agent type products come out and start to really start to do more stuff. So. So we'll see. I think the real important thing is like the models have to keep improving and keep getting people excited and then you know, obviously the demand just has, has to be there. And if that continues, then I think this can just keep going, you know, for a while. But we know that like, just to me the reason these types of cycles rhyme is just more related to like human behavior. FOMO chasing things, chasing narratives. And like there's usually just not like a clean sort of like adoption to these things. It tends to be lumpy kind of all at once. And then, and then we have to sort of reset. I think that's why Carleta Perez's framework has largely held for almost every major technological advance. And that we just, we throw too much capital at the problem, we waste a lot of capital. There's some sort of a reset at some point and then you kind of go into like the golden age of the technology. It would be very rare, I think, to just not have a reset at some point. And that's like, I think really hard to project because there's an element of this that's actually related to like, you know, geopolitics and like just positioning, like, like we're kind of in a race with other countries, you know, in terms of security, national security, all of these implications. And like you have to factor in what does that mean for policymakers and like how does, are we allowed to have a correction this time? Are we allowed to have the reset this time? And is it possible that we don't because it's such a national security concern at the same time? So a lot to factor in here, but I think hopefully this just kind of lays out what's really going on under the hood and why it's, why it's Working, you know, right now.
- [50:19]
Ryan
How similar is this in your mind to kind of, you know, the way the capital flows to the way dot com worked? Like how similar versus different is it maybe the AI boom versus the dot com boom?
- [50:32]
Michael Nadeau
So it's very similar. So this is a, this is a graphic kind of laying out dot com. So it's very similar to step one is the, you know, end demand. So every household business at the time was moving online and the main thing that was being built out at that time was, was bandwidth. So you had the telecom companies at and T Verizon building out the capex for the fiber optic and all of the bandwidth that then households and businesses were demanding. And then you had the dot coms and the telecom customers that were, you know, that's where a lot of that capital was flowing in the early days. What happened here was, you know, I think everyone knows this story where we. Too much investment went into the infrastructure, the sort of the fiber optic cabling. It was kind of a commodity. Too much went into that. We overshot the amount of demand that there was going to be in the near term. Obviously the Internet was a really important thing, it still is today. And it was not. The bubble was very real, but we just sort of overshot it. And that's the human behavior kind of element of this, I think. And the question is, is that same setup in place today? And if you're a bull and saying no, no, this is not a bubble, you would just point at the demand and the fact that we can't, people can't get their hands on enough compute. So there's no glut, there's no. And maybe until you see that happen, you know, you can just continue to be bullish. But I don't know if like, I don't know if there was like a glut before the market started to sell off and if it was more just the price just sort of led, you know, price just started to break down. We got too overheated. And then because of that, then demands, the reflexivity of that, all of a sudden people are less bullish and there's just less demand. So I think, I think it's very similar. The key question is like we overbuilt bandwidth last time. Are we going to overbuild, you know, with data centers and access to compute this time? And right now we don't see evidence of that. But it doesn't mean, it doesn't mean that it can't be.
- [52:36]
Ryan
I mean, as you say, as you say that as we're looking at the numbers here, it seems like the answer to that question is like, yes, of course we're going to overbuild, of course we're going to over provision. We always do when these major technological innovations happen. The only question, I suppose for those in the market right now and for investors is like, have we done that yet? When will that happen? And so it's kind of back to the question of is it 1998, is it 1999 or is it 2000? And if you don't know, because none of us do really, if you don't know, then how do you position yourself? Yeah, maybe we could start to get into the positioning that investors should consider under these current conditions. So how are investors positioning right now? Is it primarily bullish? I mean, they're not, they're not doing the Berkshire Hathaway play. It seems like most investors are pretty, pretty well to fully deployed as part of their mandate. Is that correct?
- [53:37]
Michael Nadeau
It seems, it seems that way. You know, when we, if we go back to late March when things were kind of heating up with, with the Iran war and markets were starting to roll over and sell off, there was a ton of hedging that had come into the markets. And what we've seen since that period, and I think that's part of the reason why we didn't come down as much, but what we've seen since, since then is the hedges have come off. Retail call options have been exploding. We recently hit 9 million contracts on a five day average. At the peak of 21, we were about 6 million contracts and we've gone up three times. Really?
- [54:16]
Ryan
Is this a good index of retail demand? Is that what this is?
- [54:19]
Michael Nadeau
Yeah, because it's, you know, retail calls versus puts are so calls people going long are 2x, 2x calls versus puts. So it's telling me that like retail, since, you know, we hit those lows in late March and we started to reverse, like there's been a very reflexive move in terms of retail getting back into the market and then sort of like just mechanical thing where hedges come off, transaction volumes are lower. There's been some other technical stuff with like CTAs and just mechanical buying that has to happen. And that's happening in like kind of a low volume environment. And so I think this has played into this big, you know, move that we've seen of late. And you know, like, like we were talking about earlier, like this could be it, it could maybe we just sort of kind of calm down for a little bit and then we have another, you know, big move. Impossible to predict. It'll seem obvious, you know, in hindsight, you know, but, but I think this is something to keep an eye on. Just like this is the positioning in the market right now. This next chart just shows, you know, the VIX has, has come off. So you know, we had a big rally, hedges have come off and it looks like markets are becoming a little more complacent again. They were not very complacent back in March. We're getting a little bit more complacent and then we can look at credit spreads is another way to just look at access to capital for businesses out there. It's pretty easy to get a loan. So markets look complacent. We just had a 25% move. We think we're, you know, in some type of a bubble framework here. We don't know. You know, it's hard to, hard to, hard to say. But the markets are kind of complacent at this stage.
- [56:12]
Ryan
So when.com ended, how did it end? Were there any, were there any signs aside from markets going crazy, the frenzy, the euphoria, the massive price gains, you know, multiple times you had three separate 30% plus whatever, 30 to 45 day events. Besides all of those things, were there any signs and how did it end?
- [56:36]
Michael Nadeau
Yeah, you know, you had the extreme concentration, you know, at the top, which we showed, you know, 40, 40% or so for, for the, for the leaders and that started to break down. So that's one thing to keep an eye on is the concentration. We talked about how only four of the seven mag. Seven have gotten back to all time highs on this, this latest rally. So that's rhymes a little bit with what we were seeing lots of dispersion, right? There was tons of dispersion when you got into the frothy zone where things are up a lot also things are falling a lot. We've seen this, this disruption with a lot of the SaaS stocks out there. You had a restrictive Fed back then. The Fed was actually hiking rates into like what seemed like a kind of overheating economy at the time. So they started hiking like mid-1999 or so. So the Fed was, was, was not like, you know, loose. They were, they were hiking into this. And you know, when you, when you hear people talk about what it was like to invest at the time, like there was, I don't think there was some like catalyst that caused the prices to just kind of start to not go up anymore. They just kind of stopped going up. And then eventually once you got into like March 2000, there was, there was like some concern around a recession in Japan. There was a, Microsoft was dealing with an antitrust lawsuit. I think that started to shift the, the markets like the narrative in the market at the time. And it kind of just, it just broke the risk on you know, kind of sentiment out there, I think. And NASDAQ ended up dropping about 78% from March of 2000 through October of 2002. You know, we had a very like. I'm not even sure if there was, it was, if we had a recession, it was a very mild recession. So you know, this didn't like, cause like a 2009, you know, style, style recession, but we took the froth out and I think a lot of that was IPOs that had happened and like sort of we talk about, you know, token unlocks in crypto, right. In a bear market you don't want to be in an asset that's sort of unlocking. And there were tons of that happening. So this is something to pay attention to with like Mag 7 for example. A lot of the Mag 7 is not able to do buybacks right now because they're using their free cash flow to invest in capex. So that, that is a shift if you have some big IPOs coming. We're going to see similar kind of unlock type period at a time when there's less buybacks happening in the market. So I think that's something to pay attention to that sort of lines up a little bit with, with doom. So I think, you know, pay attention to the structure out there, pay attention to the leaders and sort of, you know, the equal weight S&P 500 has not gone back to all time highs. If we don't see more participation from the rest of the market. I think that also lines up with what we saw in dot com. So yeah, it's a lot of factors but definitely something to keep an eye. We are more focused on the crypto markets and how that is sort of interplaying with what we're seeing in Tradfi. Crypto has had a pretty big rally here. Bitcoin's had a 35% move or so since, since mid, since early February. And we're at a really interesting inflection point on the crypto markets. And so that's where I'm spending most of my time and just really trying to understand like is if this rally continues in, in Nasdaq and S&P 500 is that actually is there A chance that it's just going to pull the crypto markets along with it. And I think that's the big, the big unknown. Typically, bitcoin actually leads the Nasdaq. So when we look at bitcoin correlations, we talked about how it's most correlated during, during bear market years. We are at the highest correlation point right now in 2026. And Bitcoin tends to lead the market here. So that'll be interesting to see. If bitcoin rolls over, it's at its right, right around its 200 day moving average, which can be resistance in a bear market. So we'll be keeping an eye on that. If bitcoin breaks down, is that a leading indicator for NASDAQ and the tradfi side?
- [60:44]
Ryan
So if you sum all this up, I'm kind of hearing, maybe I'm reading between the lines, but of course I can't tell whether this is the top or not for Nasdaq. Definitely stocks are not cheap at this time, but we could be in a period like 1999 where there's still greater gains ahead and blow off tops. And it's always painful to be out of the market when that happens. Now I know you're not an active investor in the stock market. You're more looking at the stock market in the context of the moves that you want to make in crypto. So let's say it's like 1999 and there's still more growth ahead for the stock market. Where do you think is crypto goes? So let's say the market goes up and then crashes. Does crypto get pulled along with it? And then do we have to reestablish ourselves in a new regime? Like I guess maybe sum this up in terms of how you're playing it on the crypto side.
- [61:47]
Michael Nadeau
So yeah, we've never invested in the crypto markets through I guess a sort of bubble type setup, you know, in NASDAQ, I guess, you know, 2021, we, we had some similarities there. And yeah, I mean the, I think the best thing you can do is understand the, the relationship between, you know, Bitcoin and nasdaq. We know that it's moderately correlated. It tends to be more correlated in bear market years. You know, my, the way that I'm playing this is, you know, my exposure to the tradfi side of things is like in index funds and I'm just kind of like, you know, I'm not like selling anything. I'm just kind of letting that, letting that play out. I think what you can do if you think you're in a bubble is just try to stack cash and keep an eye on things. We like to invest when like we think things are, it's a fat pitch and things are oversold. And those opportunities, I think I'm not seeing that on the crypto side. In terms of bitcoin, right now, we're kind of expecting things to potentially roll over. And if that starts to happen and, and, and NASDAQ just keeps doing its thing, I think we need to say like, you know, the crypto markets are just going to do their own thing. And this is one of the things I like about the crypto markets. Right. So one of the best things about crypto to me is like, yes, we have, there's bad things that can happen in crypto markets, but they're free markets, right. There's no, like, there's nobody in there doing stuff that you can't, you know, that, that you feel like is just against you. And, and I think on the traditional side, like every Trump tweet, you know, if you're trying to play these markets and you have somebody just kind of tweeting stuff out, that might not even be true, but the market responds to it. We know that there's, the Fed has been sort of juicing the markets a little bit here. We think there's been some manipulate, you know, there's been releasing of oil reserve. There's a lot going on that you don't control. At least in crypto it's just a market and maybe there's people doing things, but you can see it and you can, you can just kind of navigate that yourself. The thing that frustrates me on the tradfi side is just there's just so many other things and so many other incentives and things at play. And maybe that's how we see this, this shake out where, where crypto markets are just going to be independent and maybe this bear market just kind of plays out like we would expect a typical bear market to play out. And on the, the traditional finance side, you, it's just a lot more complicated with all these other incentives at play. So we'll see. Like, I wish I could give you a real concrete answer, but we are, every week we are updating the Defi report readers on market structure and exactly how we see things playing out in the crypto side. I think it's a really interesting time to be focusing on crypto. We're at a really interesting inflection point right now.
- [64:34]
Ryan
Yeah, I know you and I have been talking on the weekly TDR podcast about sort of this battle between the Bears and the Bulls that that's going on right now and who's going to win. And so we're in this interim period, I think you're like about 50% deployed into crypto and 50% dry powder on the sidelines and waiting for the market regime to reveal itself further. So this has been great. Mike, I will say for Bankless listeners, if you're not following the TDR journey on the TDR podcast, you should go subscribe to that because we are going to be releasing a new episode on Wednesday. This comes out every Wednesday. We go through the market cycle so you can get an up to date on the way Mike is playing it and how he thinks the market cycle looks. So make sure you're dialed into that. There's a link in the show notes and I gotta end with this as we always do. None of this has been financial advice. We don't know where the NASDAQ is going nor crypto prices. It's all risky. You could lose what you put in. But we are headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the Bankless journey. Thanks a lot.
- [65:46]
Michael Nadeau
Sa.