How the buzz around Chinese AI model DeepSeek sparked a massive Nasdaq sell-off

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A young Chinese AI startup, DeepSeek, sparked a massive rout in U.S. technology stocks Monday as its highly competitive — and potentially shockingly cost-effective — models stoked doubts about the hundreds of billions of dollars that America's biggest tech companies are spending on artificial intelligence.

DeepSeek's emergence is shaking up investor confidence in the AI story that has been lifting the U.S. bull market the past two years. It calls into question the hype around Nvidia's chips and rippled all the way through the market to hit shares of power producers who were set to get a boost from AI data center demand.

Here's how the DeepSeek-triggered market sell-off on Wall Street unfolded:

DeepSeek was founded in May 2023 by Liang Wenfeng, who partly funded the company by his AI-powered hedge fund. In late December, the AI developer launched a free, open-source large language model that it said took only two months to develop and less than $6 million to build.

On Jan. 20, the Hangzhou, China-based DeepSeek released R1, a reasoning model that outperformed Open AI's latest o1 model in many third-party tests.

DeepSeek is looking to differentiate from its competitors with its reasoning capabilities, meaning that before delivering the final answer, the model first generates a «chain of thought» to enhance the accuracy of its responses. 

The buzz around DeepSeek's R1 seemingly picked up steam after Alexandr Wang, CEO of Scale AI, touted its competitiveness against the best products from the U.S. megacap tech giants, which were thought to be leading the AI war. Scale AI provides data to help companies train their AI tools.

«What we found is that DeepSeek, which is the leading Chinese AI lab, their model is