On 27 January 2025, a new AI model called DeepSeek disrupted the US stock and crypto market. Nvidia, one of the largest tech manufacturers, lost nearly $600billion in a day, and the stock of crypto mining companies followed a similar trend.
Both Marathon Digital (MARA) and Riot (RIOT), two of the largest Bitcoin miners, lost over 10% in the stock market. The AI token sector also suffered heavy liquidations.
Why is a new AI model impacting the crypto market? Let’s discuss.
What is DeepSeek?
DeepSeek is a Chinese artificial intelligence company focused on advancing Artificial General Intelligence (AGI). It offers models like DeepSeek-R1 (optimized for real-time query enhancement) and DeepSeek Chat (a conversational AI). These models compete with global counterparts like GPT-4, with a noted emphasis on Chinese language proficiency.
Most importantly, DeepSeek uses advanced architectures like MoE, balancing performance and computational efficiency, which positions them competitively in the AI landscape.
DeepSeek vs. ChaptGpt: The differences
The first obvious difference is pricing. DeepSeek offers free tiers (e.g., 50 daily queries for DeepSeek-R1) to undercut competitors. You can use the AI LLM for free, which offers similar, and in some cases more efficient, performance than ChatGPT’s most advanced model, o1.
DeepSeek is built without reliance on NVIDIA’s advanced AI chips (which are banned for export to China), demonstrating China’s push for tech self-sufficiency. It’s optimized for domestic hardware (e.g., Huawei Ascend chips).
Meanwhile, OpenAI’s ChatGPT depends on Western semiconductor ecosystems (e.g., NVIDIA GPUs, cloud partnerships with Microsoft Azure). DeepSeek targets cost-sensitive enterprises and regional markets, emphasizing affordability and regulatory compliance. Competes with global models by undercutting pricing while maintaining performance.
However, there are major downsides to this new AI system that are not getting enough attention. DeepSeek in AI safety research but with less publicly documented frameworks compared to OpenAI. It aligns with Chinese governance norms such as censorship and data localization. This goes against the ‘unbiased’ nature of AI development.
Why did DeepSeek crash the crypto market?
The sudden crash in the tech and crypto markets this week (January 2025) can be attributed to the disruptive launch of DeepSeek-R1, a Chinese AI model that triggered widespread panic selling and a reevaluation of tech valuations. Below is an organized analysis of the event, detailing the causes, market reactions, and broader implications.
1. The trigger: DeepSeek-R1’s disruptive launch
DeepSeek-R1, developed by a small Chinese team, introduced a low-cost, high-efficiency AI model that significantly disrupted the market. Its performance is comparable to premium models like OpenAI’s GPT-4 but was developed at a fraction of the cost, reportedly only $5.8m. This is a stark contrast to OpenAI’s $17.9bn in funding raised concerns about the sustainability of current tech valuations.
Additionally, DeepSeek-R1 is free for up to 50 daily queries, undercutting subscription-based competitors like ChatGPT. This move threatened the profitability of U.S. tech giants and signaled a potential market shift toward cheaper alternatives.
Furthermore, DeepSeek operates without advanced NVIDIA AI chips, which have been banned for export to China since 2022. This demonstrated China’s ability to innovate independently despite U.S. trade restrictions, challenging assumptions about Western AI dominance.
2. Market reactions and cascading effects
Tech sector sell-off
The launch of DeepSeek-R1 led to a significant sell-off in the tech sector. NVIDIA, a cornerstone of the AI hardware market, saw its shares drop by 17% in a single day, erasing $1trillion from U.S. equities.
Crypto market collapse
The crypto market was not spared from the fallout. Bitcoin plunged below the key psychological threshold of $100,000, and Ethereum dropped below $3,000. Overall, nearly $920bn was liquidated from the crypto market in 24 hours on Monday 27 January 2025.
The interconnected nature of tech and crypto markets amplified the sell-off, as capital fled high-risk tech equities and simultaneously exited crypto assets.
3. Why crypto was hit hard
This event revealed the crypto market’s vulnerability to external shocks. AI-driven algorithmic trading platforms reacted to DeepSeek’s predictions of adverse market conditions, such as potential Fed rate hikes and geopolitical tensions. This triggered automated sell-offs, creating a panic-driven cycle.
Investor sentiment shifted dramatically, with traders increasing short positions on Bitcoin and betting against a recovery. Open interest data revealed a rise in bearish sentiment. Moreover, macroeconomic pressures compounded the situation. The crash coincided with the Bank of Japan’s rate hike and escalating U.S.-China trade tensions, further fueling risk aversion and market instability.
4. Broader implications
- AI industry disruption: DeepSeek’s success challenges the narrative that AI leadership requires massive capital and U.S. hardware. Its open-source model and cost efficiency could democratize AI development, putting pressure on incumbents to innovate. This disruption could reshape the global AI landscape, with China emerging as a formidable competitor.
- Geopolitical tensions: The US chip export bans, intended to curb China’s technological advancement, inadvertently accelerated China’s AI independence. This development has significant geopolitical implications, as it shifts the balance of power in the global tech industry. Analysts warn that this could lead to a new era of competition between the U.S. and China in AI and related technologies.
- Crypto’s identity crisis: The crash highlights crypto’s vulnerability to external shocks and its growing correlation with traditional tech markets. To remain relevant, crypto projects may need to integrate AI or blockchain-based compute solutions, potentially driving innovation in the sector.
5. Long-term outlook
- Market recovery potential: Historically, crypto markets have rebounded after significant crashes, such as those following the Mt. Gox and Terra/Luna incidents. Some analysts predict that renewed interest in AI-blockchain hybrids could drive future growth in both sectors. However, the path to recovery may be fraught with volatility and uncertainty.
- Regulatory scrutiny: The event may prompt stricter oversight of AI tools and algorithmic trading to prevent destabilizing market reactions. Regulators could introduce measures to ensure greater transparency and stability in both tech and crypto markets, potentially reshaping the regulatory space.
Final thoughts
DeepSeek-R1’s launch acted as a catalyst, exposing vulnerabilities in both tech and crypto markets. Its low-cost AI model disrupted valuations, while algorithmic trading and macroeconomic factors amplified the fallout.
The event reflects the risks of technological disruption in increasingly interconnected markets and raises critical questions about the future of AI governance and crypto resilience. For investors, the key takeaway is to balance innovation with caution in an era where AI can reshape markets overnight.
Further reading
- DeepSeek’s Ethereum Price Prediction For 2025
- DeepSeek v ChatGPT: How Do Their 2025 Bitcoin Predictions Differ?
-
01.
Why is DeepSeek so popular?
DeepSeek is popular due to its cost-efficient, high-performance AI models (like DeepSeek-R1), strong Chinese-language proficiency, and open-source accessibility, which challenge expensive competitors and reliance on US-based tech manufacturers.
-
02.
Is DeepSeek bad for crypto?
DeepSeek isn’t inherently bad for crypto, but its AI innovations can indirectly destabilize markets by triggering sell-offs or shifting investor focus away from speculative crypto assets during periods of tech disruption.
We're sorry you did not find what you were looking for. Please select the reason this article was not helpful.