The cryptocurrency market took a significant hit recently. On January 27, the total market cap dropped over 6.4%, landing around $3.38 trillion. This decline followed a period where traders were cashing in on profits before Donald Trump’s inauguration. AI tokens were particularly affected by this downturn.
So, what caused this drop? One major factor was the release of DeepSeek R1 by a Chinese AI lab called DeepSeek. This development had a noticeable impact on the prices of AI-related tokens. Marc Andreessen referred to it as “AI’s Sputnik moment.” DeepSeek R1 is an open-source AI language model that challenges existing beliefs about AI development. It matches or even surpasses the performance of top models from OpenAI. And it was built on a budget of just $6 million, using far fewer GPUs. This model is open-source and requires less computing power, allowing it to run on smartphones. Investors reacted by pulling back from AI-related stocks and crypto tokens.
Render suffered the most, dropping 14.6%. Other tokens like Near Protocol, The Graph, and Artificial Superintelligence saw losses of 11.4%, 11.41%, and 10.41%, respectively. Tokens heavily tied to GPUs were among the worst performers. For instance, Node. AI (GPU), which provides access to GPUs, fell more than 25% in just 24 hours. The overall market cap for cryptocurrencies in the AI sector also took a hit, declining 10% from $47.54 billion to $42.50 billion. Trading volume surged over 38% in a day, reaching $3.41 billion, which shows strong selling pressure.
Additionally, a wave of leveraged liquidations contributed to the market's decline. Leverage lets traders borrow money to increase their positions, amplifying both potential gains and losses. When the market moves against these positions, especially in such a volatile environment, it can lead to a cascade of liquidations.
Recent data indicates that the crypto market experienced nearly $853 million in liquidations within 24 hours. Out of that, $794 million came from long liquidations. Specifically, $247.95 million in long Bitcoin (BTC) positions were liquidated, and this number is still rising. This situation can create a feedback loop, where falling prices trigger more liquidations, pushing prices even lower.
The total market cap of all cryptocurrencies is struggling to hold above the 50 simple moving average (SMA), currently at $3.38 trillion. The relative strength index (RSI) has dropped from 57 on January 24 to 43. This shift suggests a change in market sentiment toward bearishness. If selling pressure increases, the crypto market could drop to the psychological support level of $3.20 trillion. Losing this support might lead to further declines to around $3.1 trillion, which aligns with the 100-day SMA. This has been a key support trendline for the total market since November 21.
On the flip side, if buying pressure picks up, the crypto market cap could rise above the 50-day SMA and approach the local high of $3.69 trillion, which was reached on January 20.