A week is an extraordinarily long time in cryptocurrency, and just as many crypto investors using conversion apps felt they could take a deep breath following an unprecedented surge in the price of Bitcoin, the market took a rather unexpected turn again for rather unexpected reasons.
Bitcoin temporarily dropped below $100,000 for the first time in a week, losing as much as five per cent of its value at the height of the slump, whilst other altcoins were down eight per cent in a similar timeframe.
These are relatively minor drops compared to the rest of the United States stock market, but the sudden turn in both markets has been blamed on the surprise launch of the same product.
There is no direct link between crypto and DeepSeek, a Chinese artificial intelligence system that has caused disruption likened to a black swan event, but the fact it has fallen as well has revealed a rather unexpected link between the stock market and decentralised finance.
Last year was highlighted not just by the crypto bull run but also by the questions it raised surrounding it as an asset. But just as the crypto world felt like they had an answer, a black swan changed the questions.
Digital Gold Or Silicon Valley Speculation?
Being built upon a rather unique technology, cryptocurrency has been inevitably linked to the technology market and the NASDAQ since as early as 2009 with Bitcoin’s inception. The connection was solidified by the first major boom for crypto starting in 2013.
Exactly where crypto’s place in wider markets would end up was always a matter of speculation, but for now, at least it has become closely linked with the technology sector, and as it has boomed, so has crypto.
This was seen most prominently in 2021, when Silicon Valley went all in on blockchain technologies, including a variety of altcoins and non-fungible tokens (NFTs).
Because most of the highest-value tokens functioned on a proof-of-work system, computer companies, particularly those who made parts required for ASICs, as well as motherboards, central processing units (CPUs) and graphical processing units (GPUs) used for mining
When that side of the market crashed in 2022, and Bitcoin fell to as low as $18,000, many of the same technology speculators moved on to the “next big thing” in general-purpose artificial intelligence.
Speculation in the space appeared, therefore, to be less a matter of what the technology actually did but the story that could be told about it and sold to investors. Eventually, the market corrects itself in the cold light of day, as it always does.
At the same time, the crypto boom of 2024 was driven in part by the surge in AI projects, and whilst there has been much speculation that Bitcoin has become a store of value and a form of commodity similar to a digital gold, its value is still linked to the boom and bust of the technology sector.
The general rule of the gold market is that it is the ultimate flight to quality; when money leaves the stock market, forex or more volatile commodities, it goes into gold, as it is seen as the safest and most stable store of value on the market.
Whilst spot ETFs for Bitcoin allow more conventional investment portfolios to invest in crypto without a wallet or exposure to what can often be a volatile market, it does not quite have the same hedging behaviours that gold derivatives do.
There is a link between the crypto market as a whole and technology stocks; when the latter was surging, such as the huge boom Nvidia, Microsoft and Google felt when they went all-in on generative AI,
Nvidia’s boom is particularly important for crypto, due to the use of GPUs still required for proof-of-work mining, and the huge investments in companies such as OpenAI.
However, a competitor in the space like DeepSeek, which is far less reliant on expensive bespoke technology, costs far less to develop and which uses an open-source model that has remarkably managed to surpass the typically dominant closed-source models could upend all of this.
Much of the technology sector crash is based on the view that a lot of stocks in the sector are significantly overvalued, and the NASDAQ fell over three per cent in a day. Nvidia itself fell 17 per cent, losing $600m in a day.
As with any trend in cryptocurrency, massive lurches of volatility can mask the true overall state of the market, and the true state of the market will become clear over the next few months for those who bought the dip.