How to profit from the AI boom in crypto 💥

Is it AI tokens’ time to fly? 🪁

August 17, 2024

GM! Welcome to Milk Road PRO – your weekly dose of crypto knowledge that unpacks more than a freshly dropped, open-source large language model. 🤖

Today, we stay at the forefront of the market by revisiting the intersection of crypto and AI.

Q1 2024 was like the perfect storm for AI tokens — everyone was bullish, and prices soared higher than a kite in Chicago**.** 

But, as with all good things, the bubble had to burst. And burst it did! 🫧

The prices of these tokens have dropped more than -50% from their all-time highs. 

But hey, don't cry over spilled crypto! Instead, let's see this as an opportunity to reassess the potential of AI in the crypto space.

[

Source: TradingView

Looking at this chart, you might be scratching your head and asking: 

Was it all just hype, or are we on the brink of a resurgence for AI tokens?

P.S. To be fair, Ethereum was also down -18% during the same period. So, it’s not just the AI tokens feeling the blues. 🎷

In order to answer the question above, today we’re diving into:

• Where is AI today, and where is it headed? ▶️

• Do we need AI on the blockchain, or is it just extra guac? 🥑

• What exclusive benefits does blockchain bring to AI? 🔑

• How can investors profit from the AI boom? 📈

Our goal is to dive deep into the AI market to uncover if we can capitalize on it. 

Spoiler alert: We believe there’s a profitable path ahead. 🤑

However, this opportunity is a bit different from what we're used to. But don't fret—we'll explain why this is a different ballgame and how we plan to approach it.

If you're a passionate investor in cutting-edge technologies like blockchain and AI, this report is a must-read for you. 👓

WHAT IS THE CURRENT STATE OF AI? 👀

Since the debut of ChatGPT in November 2022, we've cruised past the initial AI hype bubble.

Throughout 2023, despite the overall market stagnation, AI remained a hot topic.

Interest in AI continues to heat up, even though market enthusiasm has decided to take a nap. But maybe that’s just in crypto, because Nvidia has been booming, up ~60% in the last 6 months. 🚀 

Nvidia's been the golden child of the AI era, thanks to its production of those oh-so-essential GPUs.

As AI adoption increases, so does the demand for Nvidia's products, ultimately driving up stock prices. 📈

So, the question is: Who else will benefit from this AI boom, and how?

• Companies with extensive data: More data equals better AI training. Think of data as the secret sauce for AI's success. 🤖

• Companies with top AI engineers: Access to the best talent and expertise! The brains behind the bots. 🧠

To put it simply, AI are 'machines' trained on vast amounts of data, crafted by skilled engineers.

It's very likely that the entire world will eventually hop on the AI bandwagon to stay competitive. 

AI brings massive efficiencies, making it a no-brainer for businesses aiming to maintain their edge.

Think of it this way. 

If AI performance matches that of your $5,000-a-month assistant but costs only $50 a month, will you still keep your assistant?

P.S. AI won't make you a coffee though—not yet at least! 😂

So let's take a look at the crème de la crème of AI models and see how they excel in various areas:

[

Source: Flask

The best performing models are: 

• ChatGPT (OpenAI, Microsoft)

• Bard (Google)

• Claude (Anthropic - former employees of OpenAI, Amazon)

• LLaMA2 Chat 70B (Meta - Facebook)

Don’t worry if you’re not familiar with the names. The key takeaway is that the top-performing AI models come from tech giants! 

Is it a coincidence? Nope. These companies have access to:

• High-performance GPUs

• Extensive data

• Top AI talent

This is crucial to understand. The combo gives major tech giants a significant advantage and makes them tough to compete with.

There are rumors that each new version of ChatGPT causes the downfall of hundreds or even thousands of startups. 😔

But don't be discouraged. We believe there's something that could level the playing field. We'll discuss that shortly. 

First, let's revisit whether we need AI on the blockchain in the first place.

DO WE REALLY NEED EVERYTHING ON THE BLOCKCHAIN? 🤔

We'll kick things off by exploring the unique advantages that blockchains offer and why an increasing number of companies are jumping on board. 🚂

Then, we'll try to explore if there is some parallel with AI on blockchains. 

Stick with us, as it's crucial to understand that:

While some innovations naturally fit on the blockchain, others, though appealing, don't align with the practical needs and preferences of most users. 🤖

Although at one point, we all believed everything needed to be onchain. ⛓️

Reality is that most people don't care about that. Values like trustlessness, transparency, censorship resistance, and self custody aren't strong enough arguments for the majority of people. 

They won't use products or services simply because they're on the blockchain. Instead, they focus on user experience, quality, and price. 💲

The crypto industry learned the hard way that blockchain adoption will be driven by companies (supply side), not users (demand side). 

What do we mean by that? Products won't be built on the blockchain because users want them, but because it's more profitable for companies to build on the blockchain. 

We can see that blockchains are being adopted by major companies like Stripe, PayPal, BlackRock, and Visa. Why? 

Because blockchains offer better infrastructure alternatives. 

For example, PayPal isn't launching its own stablecoin on Solana because users demand it. They're doing it to reach a larger market and offer cheaper, faster transactions.

If they didn't, someone else would, and they'd lose their edge. ⛸️

This marks a shift in blockchain adoption from the user side to the supply side.

Okay, that makes sense. Now, let's shift our focus back to AI.

To invest wisely in AI tokens, we must create a robust thesis. 

A key element of this is figuring out who will spearhead AI x blockchain adoption: users (demand side), companies (supply side), or maybe neither?

So let's try to figure that out quickly before we dive into exploring some AI tokens.

Do users need AI on the blockchains?

Let's think about it for a second. Most people use AI to answer questions or ask AI to perform specific tasks. 

So, what do they really care about?

They want quick and accurate answers while spending as little as possible. In broader terms, it all comes down to the same things: user experience, quality, and price.

And so, will AI on the blockchain improve any of that? No. Users don't need AI on the blockchain. ⛔

Fine, let's examine whether the supply side can benefit from blockchain implementation.

Is there an analogy similar to PayPal? In other words, are there any incentives for Google or Microsoft to start using blockchains for their AI models?

Again, no.

Are there any catalysts that might change this?

Possibly. Certain regulations and compliance requirements could push major AI players to use blockchain. However, it's still an open question and seems to be years away.

But what is clear is that people want to invest in or speculate on the AI boom regardless. 

And beyond buying stocks of Nvidia or big tech companies like Microsoft or Google, their options are very limited. 

Therefore, AI tokens are a promising avenue for people to capitalize on this trend. 🚀

So, even without a robust thesis, there might still be ways to capitalize on this trend after all. 🤔

But before we explore some options, we want to explain the use case when AI and blockchain integration make perfect sense.

WHERE AI MEETS CRYPTO ➕

Just a reminder. Here are the three key components driving AI:

• GPUs

• Data

• AI Talent

We have an abundance of these resources worldwide, but the real challenge lies in seamlessly integrating them. 🧩

So how do we bring together the raw power of GPUs, the vast oceans of data, and the brilliant minds of AI talent into a cohesive, unstoppable force? 

👉 By harnessing blockchain technology to seamlessly coordinate all aspects and effectively reward contributions.

Sounds familiar? Yes. This is the same mechanism that is used for DePIN. 

Kind of like how Helium aims to sell cell plans across the US and compete with giants like AT&T and Verizon—something that wouldn’t be possible without blockchains.

Similarly, some AI projects in crypto might aspire to compete with OpenAI or Google (with decentralization as a key advantage). 

Some examples of this would are:

• Gathering unused data storage worldwide and putting it to use.

• Harnessing idle GPUs globally.

• Bringing together AI engineers to collaborate.

• Automatically generating proof of contributions.

• Efficiently rewarding contributors.

That’s precisely what blockchain makes possible, and it’s why the fusion of AI and crypto is so revolutionary and exciting. 🥳

There are many projects tapping into this opportunity today, but the main question is: Is it the right timing? ⏲️

Think of the internet in 1995, AI in 2012, or VR in 2015. These technologies had enormous potential and hype, but they each needed the right conditions and market readiness to truly take off. 🛫

• The internet in 1995: The internet was just becoming accessible to the public, but infrastructure and user adoption were still developing. It took years for broadband to spread and for e-commerce and social media to dominate.

• AI in 2012: AI saw major advancements in machine learning and deep learning, with companies showcasing real-world applications. However, it needed more development and data to become integrated into everyday tools.

• VR in 2015: VR gained interest with promises of revolutionizing various fields, but the hardware was expensive and content was limited. It took a few more years for improved devices and broader applications to gain traction.

Imagine investing in these technologies back then. Even though you were right about the technology, you were wrong about the timing—way too soon. 🥺

That's what we aim to avoid here.

So even though it sounds exciting and many projects are building in this space, it will likely take a few years for crypto AI projects to truly take off—find the right business models, attract a large user base, establish product-market fit, and achieve mainstream adoption.

Maybe next cycle? 🤔 

Who knows…

And yet, we still believe there's an opportunity to approach AI as a narrative investment. 

We think the people entering the space won’t care (or know) about the fundamentals. They’ll latch onto the AI narrative and feel FOMO, driving up the prices of AI tokens regardless of actual success in the projects. 

So here is our approach 👇

HOW TO PLAY THE AI NARRATIVE IN CRYPTO 📖

There are many AI tokens available, but choosing one can be challenging. 

We are quite sure that most AI tokens won't make fundamental sense this cycle. However, some AI tokens might represent a great narrative play. 🎭

Narratives thrive on tokens that are highly ambitious and easy to understand, making them exciting and engaging. It's not about the tech, product, or users—it's about the story.

So the question is: Who has the most compelling and ambitious story? 📗

We've chosen four popular crypto AI projects to examine their stories: Could of these AI tokens be the one that everyone wants to hold, believing it will change the world? 🌐

Keep in mind that we won't delve into too much detail for each project.

This serves as a good filter: If the high-level idea of a project isn't compelling enough, we're not interested. 

After all, if it doesn't capture our interest on the elevator pitch, it likely won't capture anyone else's either. 

Narratives are all about attention and excitement. So with that in mind, let's get into it. 🧠

1/ Akash: Decentralized compute marketplace

Akash is an open network that lets users buy and sell computing resources, essentially acting as a marketplace for GPUs—which are critical for running and training AI models.

Akash offers significantly cheaper alternatives to traditional services like AWS (Amazon) and Azure (Microsoft).

With the recent AI boom driving up demand for computation and causing shortages, Akash is well-positioned to meet this surge.

By providing affordable computing solutions, Akash has the potential to become a major industry player. 

However, for any marketplace to truly thrive, it needs both strong supply and demand. Plus, marketplace margins are usually quite low. 

Let’s take a look at the total dollars spent on renting computation on Akash since its launch in March 2021.

[

Source: Akash

Since its launch in March 2021, $612K has been spent on renting computation. However, most of this amount goes to compensating sellers. 

So Akash has likely generated less than $100K in revenue since their launch but has a fully diluted valuation (FDV) of around $750M. 🤯

❗ Akash is definitely a great project with a clear business plan and strong growth potential. But it doesn't fit into our narrative thesis.

2/ Filecoin: Decentralized cloud storage network

Filecoin enables users to store and retrieve data using a distributed network, offering secure, efficient, and cost-effective data storage. 🗄️

Filecoin operates similarly to Akash by connecting buyers (those looking for storage) with sellers (those offering storage). 🤝

And because AI requires vast amounts of data, more data will be stored. This is where Filecoin fits into the AI narrative. 💡

However, we still haven't seen the accelerated revenue growth for the protocol. 🤔

[

Source: TokenTerminal

Filecoin generates around $800k a month, which isn't that bad, and they are constantly shipping new features.

But, with a current valuation of $8.2B, the upside potential for investors seems limited.

It's a similar story to Akash’s. Both have solid businesses, but the hype about AI attracting significantly more users (buyers/sellers) has yet to materialize. 

Even if the narrative does come around, these projects may not be the ones everyone is talking about. 🗣️

❗ To clarify, Filecoin has a sound business model but appears quite boring.

3/ Autonolas Protocol: Autonomous AI agents

The Autonolas Protocol uses smart contracts to coordinate, secure, and manage software code on a public blockchain.

They connect developers who create AI agents with users who want to utilize these AI agents. 🤝

Think of AI agents as junior-level assistants performing specific tasks. You can buy and sell these AI agents as services.

That sounds more interesting, right? 😂

Let's look at some numbers.

So far, 36 AI agents have been created, and they have completed nearly 1M onchain transactions.

[

Source: Dune

However, almost 95% of these transactions are attributed to a single agent, which functions as a market maker on Gnosis Chain's prediction markets**.** 🤖

We didn't find any information on their revenue generation, but their fully diluted valuation (FDV) stands at $650M.

Overall, that's much more exciting than just GPU or storage marketplaces, isn't it? 

However, we don't see a bunch of developers flocking to Autonolas, creating innovative projects, or generating buzz. It also doesn't seem to have big visions or ambitious goals. 

❗While it sounds cool, we don't believe it will be highly attractive to many people.

4/ Bittensor: Decentralized production of AI

Bittensor aims to build a powerful ecosystem for creating decentralized AI. 

To achieve this, they’ve designed subnets—digital markets that reward people for sharing their skills, intellectual property, and digital resources (compute power, storage, and bandwidth). 

Unlike other crypto-AI projects that focus on specific areas like storage, training, or data collection, Bittensor competes with AI giants like OpenAI and Google by covering the entire AI lifecycle. 

From data collection to hosting models, Bittensor offers a comprehensive approach to AI development. See the picture below. 👇

[

Source: Messari

That sounds rather exciting, eh? 😆

GPU marketplaces, data wholesalers, or decentralized storage are all interesting, but they're not ambitious enough. It doesn’t feel like they are going to change the world…

But Bittensor might. At least, they have the ambition to build an entire AI platform capable of eventually competing with the biggest giants. 🗿

❗So this project fits well into our narrative thesis, and we believe Bittensor ($TAO) could be the best AI play out there.

We don’t focus too much on their tokenomics, team, or fundamentals here. What matters to us is their story, and we love it! 💌

So let's summarize today's learnings.

KEY TAKEAWAYS 🔑

We began with a high-level overview of the AI market, explored the intersection of AI and blockchain, and evaluated some AI tokens to see if they align with an upcoming AI narrative wave.

Here are the key takeaways from our report:

• AI is a game-changer for how we live, work, and communicate.

• The entire world will eventually adopt and rely on AI.

• Big tech giants have the resources to dominate the AI market.

• AI can thrive without blockchains today.

• Blockchains offer unique features that can boost open-source AI development.

• Bittensor has the potential to be the leader in the AI narrative.

And that's a wrap for today! 👍

We hope this has helped you better understand the intersection of AI and crypto. Whether you choose to invest in AI tokens or not, you'll now have a clearer idea of the reasons behind your decision.

While we are fundamentally driven investors, we also believe that AI tokens could see a resurgence, with some performing exceptionally well. 🧐

However, we do not recommend holding them long-term. 

These narrative-driven plays typically last a few months, so it’s crucial to exit your position before prices drop dramatically—sometimes by as much as 80%-90%.

This is one of the main reasons why we started the Milk Road PRO Portfolio, to show people what we hold, why we hold it, and how we rebalance based on risk/reward. 

If we decide to play this narrative, we'll share our insights with you on our Discord. Make sure to join us there. 👍

Good luck, stay milky and take care! 🫡

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