What happens when you combine cryptocurrency and artificial intelligence?

You don’t get a bitcoin that writes its own code in the style of a haiku, but you do get billions of dollars of trading in a new class of crypto tokens.

The AI obsession that has taken the tech world by storm, with the emergence of bots like ChatGPT and Bard, is now reaching the cryptocurrency domain with a surge of interest in AI-related blockchain projects.

Kaiko data showed that daily trading volumes of the biggest coins such as SingularityNET, Fetch.AI and Render topped $1 billion in early February, hitting a two-year high.

AI-powered blockchain products offer a wide range of services, including payments, trading models, machine-generated non-fungible tokens and marketplaces for AI applications that allow users to pay developers in cryptocurrency.

“This is a really exciting development, as it’s one of the first times machine-learning applications are being brought on-chain in a major way,” said Eric Chen, CEO of decentralized finance platform Injective Labs. He added, however, that “the digital asset space is no stranger to hype, speculation and overblown expectations.”

Investors have been rewarded handsomely for their faith so far. The CoinDesk Indices Computing Index, which includes AI-linked tokens, has risen by 60% this year, and spiked even higher in February due to the popularity of OpenAI’s ChatGPT.

Although trading volumes dropped in March, they remained above the long-term crypto sector average. Kaiko analyst Dessislava Aubert noted that many tokens have significantly outperformed bitcoin, with YTD returns ranging from 150% to 780%.

There has also been a rise in investment in the sector. CryptoGPT, which enables users to sell their data to AI companies, just raised $10 million in funding this month.

Despite these alluring returns, the AI-crypto sector remains relatively small – the combined market cap of CoinGecko’s AI-classified coins is $2.7 billion, a tiny fraction of the $1.2 trillion total crypto market.

Some projects may be riding the AI wave without a solid plan, so a few winners may emerge from the pack, warned market players.

“There’s potential for AI and blockchain to work together, but I’m not sure how many of the current projects are using it properly,” said Ryan Rasmussen, Bitwise research analyst. He noted that it’s important to “look under the hood.”

AI-CRYPTO: BIG POTENTIAL OR HYPE?

Investors are hoping that these projects can help them identify projects that can solve certain problems, draw more people to blockchain products, and deliver solid returns.

“Some specific AI initiatives could be the ‘killer app’ for public blockchains,” said Pranav Kanade, portfolio manager at VanEck. He divides the AI-crypto world into products that offer immediate solutions and longer-term investments.

In the immediate future, decentralized computing networks could potentially let users with unused GPU capacity lend it to others who need it for AI learning models, said Kanade.

Blockchain-based marketplaces could also make it easier for developers to gain market share and smaller users to get access to AI tech, industry watchers said.

SingularityNET is an example of such a platform, and its token market cap has jumped from $52 million to over $414 million this year.

Other potential long-term use cases include using blockchain as proof for distinguishing between AI and human-generated content.

Many investors know that this is a long-term game, but they’re hoping that a few success stories will outweigh the risks, said Todd Groth, head of index research at CoinDesk Indices.

“You’re investing in projects, many of which will never come to fruition,” he said. “You just need a few names that will do extremely well.”