Soaring Costs: A Reality Check for the Market's AI Trade

Citadel Securities and other research firms are sounding the alarm on the rising costs associated with the AI trade. The increasing expense of using crypto tokens to pay for AI services is set to become a major challenge for hyperscalers driving demand.

The main issue is that the use of these tokens will be expensive for hyperscalers, and this could lead to a decrease in token spending and a slowdown in development efforts. According to Citadel Securities macro strategist Frank Flight, frontier models will be "expensive to run, constrained by physical bottlenecks, and vulnerable to unrealistic expectations of frictionless deployment cost."

Flight also noted that adoption is becoming less about what frontier models can do in principle, and more about the price and scarcity of the inputs required to make AI operational at scale. This could lead to a shift in focus for investors, from riding momentum around AI to focusing on firm margins and profitability.

Some companies, such as Amazon and Microsoft, are already taking steps to address skyrocketing AI costs. This could lead to a more selective and cost-conscious approach to AI development, which may impact asset prices.

Citadel Securities remains constructive on the terminal outcome of AI as a productivity-enhancing technology, but warns that the route to that value is likely to be more challenging than markets once assumed.