DeepSeek Disrupts Bitcoin and Crypto Market with AI Model Launch

DeepSeek, a Chinese startup, launched its latest AI model, competing with industry-leading Large Language Models in the U.S. at a fraction of the cost

DeepSeek, a Chinese startup, has launched its latest AI model, which is disrupting the U.S. market for Large Language Models (LLMs) and impacting Bitcoin (BTC), crypto and the AI agent economy. The arrival of DeepSeek in the U.S. has led to a strong sell-off in AI agent tokens, while Bitcoin price remained largely unphased by the event.

According to Crypto.news analysis, DeepSeek’s latest AI model is priced at 14 cents per million tokens, significantly lower than the $15 per million tokens charged by GPT-4. This vast price disparity has sparked concern among U.S.-based crypto traders about a potential market correction.

The launch of DeepSeek comes at a crucial time as U.S. equities and tech stocks are experiencing a downturn. This event is putting pressure on crypto traders to identify the next market mover, especially in the absence of major U.S. crypto exchange launches.

Meanwhile, derivatives data is revealing a knee-jerk response from crypto traders to China’s AI future.

Bitcoin futures premiums on CME turned negative for the first time since August 2023, indicating a shift in sentiment. Open interest (OI) in BTC declined sharply, with the largest daily decrease.

Analysts at K33 Research estimate that the decline in OI was driven by active market participants reducing their exposure by 14,875 BTC tokens. Data suggests that expiring January contracts on Friday could push OI lower.

Although premiums recovered to slightly positive territory, CME activity indicates bearish sentiment among derivatives traders, favoring caution this week.

Bitcoin’s Monday decline could be considered noise on the longer timeframe, but the aggressive derisking on CME fuels a narrative of caution among traders as BTC premium slipped into the negative territory for the first time.

On-chain data from Santiment shows that Bitcoin traders de-risked promptly, with over $1 billion in profits realized on BTC holdings on Monday. The total OI in Bitcoin has recovered since then, and the total funding rate aggregated by asset is back in positive territory, as seen in the chart below.

Bitcoin suffers from a strong correlation to U.S. equities

Bitcoin and U.S. equities have enjoyed a relatively strong correlation in the current quarter, and this remains one of the most reliable market dynamics for traders in Q1 2025. Bitfinex analysts identified the 30-day rolling Pearson correlation between Bitcoin, the S&P 500, and the NASDAQ as 0.7.

The numbers are coincidental but likely an indicator of traders treating BTC as a risk-on asset, moving in lockstep with traditional equities. Over the course of last week, Bitcoin options implied volatility reduced by 13%. It can be interpreted as traders expecting no major movements in BTC price this week.

Bitcoin traders keep their eyes peeled for the U.S. Federal Reserve’s interest rate decision this week. Considering the impact of the previous FOMC meeting, the sentiment has shifted towards derisking ahead of the announcement, traders can gear for a decline in BTC price prior to the announcement.

Bitcoin price has noted heightened volatility within the first 20-30 minutes post U.S. macro releases since the beginning of the bull run in 2024.

DeepSeek’s launch impacted NVIDIA negatively, and BTC was not immune to the event. DeepSeek therefore eclipsed the “Trump effect” on Bitcoin, even as traders await updates on the national Bitcoin stockpile and strategic reserve, events in tech and AI continue to jolt BTC and altcoins, alongside equities.

Top 5 altcoins to watch during the shifting AI and tech tide

Data from SoSoValue, an AI-powered crypto investment platform, shows that the DeFAI and AI agents category has corrected the most in response to DeepSeek’s arrival in the U.S. market.

The DeFAI sector’s market cap corrected 28.73% in 24 hours. The top four tokens in the sector suffered double-digit corrections, over 20%. Among DeFAI tokens, Griffain (GRIFFAIN), Orbit (GRIFT), Hive AI (BUZZ) and Neur.sh (NEUR) noted steep corrections on Monday; the tokens have started their recovery in the past 24 hours.

In the AI agents category, leading projects such as Fartcoin and mainstream AI tokens, ai16z, AIXBT, and AI Rig Complex were corrected in double-digits.

The meme coin sector was not immune to DeepSeek’s release and suffered over 8% decline in its market capitalization within a 24 hour timeframe. Pepe (PEPE) observed the steepest correction in the top meme coins, down by 11.33% on Monday, offering sidelined buyers an opportunity to buy the dip.

Layer 1 tokens suffered the least among other categories,