DeepSeek Panic 😱

Market Musings 1/27/2025

Quick thoughts on the markets and major portfolio news. Not on Ursa yet? Download Ursa from the App Store!

---

What’s DeepSeek and why did markets tank because of it?

---

DeepSeek is a new Chinese #AI model similar to OpenAI’s GPT which powers ChatGPT.

So why are markets freaking out?

DeepSeek took the market by surprise.

1. DeepSeek uses reinforcement learning－meaning it can improve itself without human supervision. Meanwhile, GPT needs supervised fine-tuning for improvements.

2. DeepSeek was developed at a fraction of the costs GPT has needed. This looks bad for the amount of investment GPT and other US #AI models have required. It also highlights China’s #AI capabilities may not be as far behind the US as previously thought.

3. DeepSeek isn’t as power hungry as GPT. Basically, DeepSeek can run with fewer and less powerful #AI chips. This could mean the massive #AI infrastructure spending may not be needed with a more efficient #AI model.

As expected, #AI along with the rest of tech tumbled on the news. The tech-heavy NASDAQ was down over 3% on Monday. However, the market weakness was mostly constrained to tech with most other sectors green.

So what does this all mean?

We’d caution jumping to conclusions as markets tend to whiplash on new news. The #AI trade already had investors skeptical of a bubble and have been looking for a reason to reduce positions and lock in gains.

However, this does put the #AI trade on watch.

#AI chip makers like Nvidia have been surging on the server infrastructure buildout. The expected #AI demand was previously predicated on the sheer amount of power needed for GPT models.

While a lot is still unclear right now, at the very least, DeepSeek has now introduced the very likely possibility that the massive server buildout and power requirements of new GPUs may have been overstated for scaling #AI applications. DeepSeek is also open source meaning we’d expect newer model of US developments to employ similar tech and overall reducing future #AI server demand needs.

On a more geopolitical level, markets are also likely worried about the US’s lead over China in #AI development. DeepSeek’s cost and power gains were mostly driven by optimizations which still limits its ceiling. It appears the semi export restrictions to China may not have had its intended impact which may mean more restrictions coming soon.

Again, this is an evolving story and markets may be overreacting today. However, we do think this could likely change up the approach to #AI development and emphasize lower cost and lower power solutions.