How DeepSeek-R1 Triggered a Crypto Market Sell-Off Overnight

Over the weekend, DeepSeek-R1, an AI model from a small team of Chinese developers, caused chaos in global markets. Launched on January 22, 2025, this seemingly innocent project has already wiped out billions of dollars in the stock and crypto markets.

The new model, designed as a “reasoning” AI, is shaking up the tech world by offering the same performance as major U.S.-based models like OpenAI’s $200/month ChatGPT o1— but for free.

What Really Happened?

In just a few days, DeepSeek-R1’s introduction sparked panic across tech and crypto markets. The U.S. stock market saw a dramatic drop, losing over $2 trillion in value, while the crypto market lost around $300 billion.

Investors quickly sold off tech stocks and crypto assets, fearing the model’s efficiency would disrupt existing AI giants. Ash Crypto (@Ashcryptoreal) summarized it best:

• Market cap wiped out from the U.S. stock market: $2 trillion
• Market cap wiped out from the crypto market: $300 billion
• One app with $150m valuation has wiped out $2.3 trillion from the stock and crypto market.

DeepSeek-R1’s launch has caused a ripple effect. As prices dropped in traditional markets, the sell-off spilled into the crypto space. Bitcoin (BTC) and Ethereum (ETH) were hit hard, with BTC down 5.82% and ETH falling by 7.82%.

What Makes DeepSeek-R1 Different?

Unlike the typical “responsive” AI models that generate answers based on scraped data, DeepSeek-R1 is a “reasoning” AI. It thinks through problems step-by-step, much like a human, making it more efficient and powerful. It’s also cost-effective: Free for up to 50 messages a day and cheaper than alternatives when you exceed that limit.

– Advertisement –

The timing of DeepSeek-R1’s release, alongside its ability to operate without advanced NVIDIA AI chips—banned for export to China since 2022—has raised questions about its role in recent market turbulence.

A post by GoodCapitalVC highlighted that DeepSeek-R1 surpassed ChatGPT as the top app on the Apple App Store over the weekend, signaling its rapid adoption.

The model forces companies to rethink their strategies, especially when it comes to AI infrastructure. Companies like OpenAI and Nvidia, which rely on expensive hardware and subscription models, are now being challenged by a free alternative.

This disruption has triggered a wave of uncertainty in the tech sector, and as a result, it spilled over into crypto markets. Investors who were already wary of macroeconomic pressures, such as the recent rate hikes by the Bank of Japan and the ongoing trade tensions with China, decided to sell off riskier assets.

Why Crypto Market Felt the Impact

The crypto market has become more connected to traditional tech industries, especially as institutional investors show increasing interest in digital assets.

A decline in tech stocks, as seen with DeepSeek-R1’s impact, now directly affects crypto. As money exits traditional tech stocks, it often flows out of crypto too. This interconnectedness was evident as both markets took a hit.

Crypto, while still a relatively young market, is now highly sensitive to movements in traditional tech. The DeepSeek-R1 sell-off is just another sign of how intertwined the two sectors have become.

While DeepSeek-R1 captured headlines, other macroeconomic factors also contributed to the sell-off. The Bank of Japan’s rate hike decision added pressure to global markets, while ongoing geopolitical tensions, including tariff threats from U.S. President Donald Trump, further rattled investor confidence.