Here’s why DeepSeek crashed your Bitcoin and crypto
The Bitcoin price dropped 6% on Jan. 27 when stock markets responded to the debut of China’s open-source, highly efficient AI model that investor Marc Andreessen dubbed “AI's Sputnik moment.”DeepSeek spooked US markets on news that the model’s developers were able to produce a worthy competitor to American AI firms like OpenAI at a fraction of the cost. The firm claims it was able to develop its AI model on a shoestring budget of just under $6 million using less advanced hardware from semiconductor manufacturer Nvidia. Tech stocks took a beating. All of the “Magnificent Seven” — Apple, Nvidia, Tesla, Microsoft, Amazon, Meta and Alphabet (Google) — saw losses, with Nvidia breaking a Wall Street record and dropping nearly 17% on the day. The cheaper and more energy-efficient DeepSeek even sent energy utility stocks spiraling — as they were counting on revenues from more power-intensive computing of US-based models like ChatGPT. Crypto wasn’t spared either; major coins like Bitcoin and Ether saw 6% and 7% losses respectively, while some altcoins suffered losses in the double digits.Seasoned crypto traders are no strangers to double-digit price swings, but the coinciding drop in price shows that cryptocurrencies are indeed a risk-on asset and are subject to the same market forces that impact traditional finance. DeepSeek rattles tech stocks, Bitcoin and cryptoOne of the primary reasons behind this “Sputnik moment” is that it surprised the market. The dominant narrative around AI marked the United States as an industry leader. Just last week, US President Donald Trump announced a $500 billion plan to invest in AI and cement his country as the global leader. Cryptocurrencies and the shares of crypto-related firms like MicroStrategy also fell, even though crypto has “nothing to do” with DeepSeek, SMARDEX decentralized exchange founder Jean Rausis told MarketWatch. Rather, crypto was simply a victim of broader market sentiment. JP Richardson, CEO of crypto exchange Exodus, told Fortune that crypto is a “risk-on” asset and “When there are any shakes or fears in the stock market” such as the appearance of an unexpected AI model, “typically, you see a correlation in the fall of price in the stock market, and that of cryptocurrency and Bitcoin.”Crypto market maker Wintermute wrote, “Whilst crypto is void of near-term narratives, correlations are driving flows and de-risking is flagged.”In other words, crypto investors were spooked and sold off. The correlation between Bitcoin and stock prices has long been studied as digital assets see broader adoption and acceptance in traditional financial markets. An investor note from BitMEX indicated that the correlation between crypto and equities will stick around for a while. “The strong correlation between bitcoin and equities, especially in the current quarter, remains one of the most reliable market dynamics.”For the most part, prices have started to stabilize and recover, although crypto mining stocks are still seeing minor losses.While the relatively quick recovery is likely little consolation to the traders who saw hundreds of millions of dollars in long positions liquidated on Monday, some analysts are still optimistic.