The race for domination in artificial intelligence was blown wide open on Monday after the launch of a Chinese chatbot wiped $1tn from the leading US tech index, with one investor calling it a “Sputnik moment” for the world’s AI superpowers.

Investors punished global tech stocks on Monday after the emergence of DeepSeek, a competitor to OpenAI and its ChatGPT tool, shook faith in the US artificial intelligence boom by appearing to deliver the same performance with fewer resources.

The tech-heavy Nasdaq Composite closed down 3.1%, with the drop at one point wiping more than $1tn off the index from its closing value of $32.5tn last week, as investors digested the implications of the latest AI model developed by DeepSeek.

Nvidia, a leading maker of the computer chips that power AI models, was overtaken by Apple as the most valuable listed company in the US after its shares fell 17%, wiping nearly $600bn off its market value. Google’s parent company lost $100bn and Microsoft $7bn.

Nvidia’s fall was the biggest in US stock market history.

The DeepSeek AI assistant also topped the Apple app store in the US and UK over the weekend, above OpenAI’s ChatGPT.

US President Donald Trump said DeepSeek should be a “wake-up call for our industries that we need to be laser-focused on competing to win”.

He said he had been “reading about China” and its companies, in particular one that had come up with a “faster method of AI and [a] much less expensive method”.

“That’s good because you don’t have to spend as much money. I view that as a positive, as an asset,” Trump said.

OpenAI chief executive Sam Altman praised DeepSeek’s launch, saying that it was “invigorating to have a new competitor”.

In a social media post, Altman called it “an impressive model, particularly around what they’re able to deliver for the price”.

Japanese tech firms linked to the AI sector tanked for a second straight day on Tuesday as investors tracked the rout on Wall Street. Advantest plunged more than 9%, while tech investor SoftBank, a key investor in Trump’s Stargate AI project, tumbled more than 5%, having lost 8% the day before.

Most other Asian markets rose in limited trade ahead of the lunar new year break.

DeepSeek was hit with a cyber-attack on Monday, forcing it to temporarily limit registrations. On its status page, DeepSeek said it started to investigate the issue late Monday night Beijing time. After about two hours of monitoring, the company said it was the victim of a “large-scale malicious attack”. While DeekSeek limited registrations, existing users were still able to log on as usual.

DeepSeek claims to have used fewer chips than its rivals to develop its models, making them cheaper to produce and raising questions over a multibillion-dollar AI spending spree by US companies that has boosted markets in recent years.

The company developed bespoke algorithms to build its models using reduced-capability H800 chips produced by Nvidia, according to a research paper published in December.

Nvidia’s most advanced chips, H100s, have been banned from export to China since September 2022 by US sanctions. Nvidia then developed the less powerful H800 chips for the Chinese market, although they were also banned from export to China last October.

DeepSeek’s success at building an advanced AI model without access to the most cutting-edge US technology has raised concerns about the efficacy of Washington’s attempts to stymie China’s hi-tech sector.

Marc Andreessen, a leading US venture capitalist, compared the launch of DeepSeek’s R1 model last Monday to a pivotal moment in the US-USSR space race, posting on X that it was AI’s “Sputnik moment” – referring to when the Soviet Union astounded its cold war rival by launching a satellite into orbit.

According to DeepSeek, its R1 model outperforms OpenAI’s o1-mini model across “various benchmarks”, while research by Artificial Analysis puts it above models developed by Google, Meta and Anthropic in terms of overall quality.

The company was founded by the entrepreneur Liang Wenfeng, who runs a hedge fund, High-Flyer Capital, that uses AI to identify patterns in stock prices. Liang reportedly started buying Nvidia chips in 2021 to develop AI models as a hobby, bankrolled by his hedge fund. In 2023, he founded DeepSeek, which is based in the eastern Chinese city of Hangzhou.

The company is purely focused on research rather than commercial products – the DeepSeek assistant and underlying code can be downloaded for free, while DeepSeek’s models are also cheaper to operate than OpenAI’s o1.

In an interview with Chinese media, Liang said “AI should be affordable and accessible to everyone”. Liang also said that the gap between US and Chinese AI was only one to two years.

The DeepSeek development raises doubts over the necessity for hefty investment in AI infrastructure such as chips and the market-leading role of US tech companies in AI, which in turn threatens to put American tech sector valuations under pressure.

DeepSeek claims R1 cost $5.6m to develop, compared with much higher estimates for western-developed models, although experts have cautioned that may be an underestimate. Last year Dario Amodei, the co-founder of leading AI firm Anthropic, put the current cost of training advanced models at between $100m and $1bn.

Analysts at US investment bank Goldman Sachs raised the alarm over AI spending last year by publishing a note in June with the title “Gen AI: too much spend, too little benefit?”

It asked if a $1tn investment in AI over the next few years will “ever pay off”, voicing concerns about a return on spending that may have been crystalised by DeepSeek.

The pan-European Stoxx 600 fell on Monday, and major European technology stocks were down. The Dutch chipmaker ASML slid by 7%, while Germany’s Siemens Energy, which provides hardware for AI infrastructure, was down nearly 20%, and France’s digital automation company Schneider Electric fell by 9.5%.

Richard Hunter, the head of markets at the platform Interactive Investor, said: “It will almost certainly put the cat among the pigeons as investors scramble to assess the potential damage it could have on a burgeoning industry, which has powered much of the gain seen in the main indices over the last couple of years.

“The larger question has suddenly become whether the hundreds of billions of dollar investment in AI needs re-evaluation.”

Dr Andrew Duncan, the director of science & innovation at the UK’s Alan Turing Institute, said the DeepSeek development was “really exciting” because it “democratised access” to advanced AI models by being an open source developer, meaning it makes its models freely available – a path also followed by Mark Zuckerberg’s Meta with its Llama model.

“Academia and the private sector will be able to play around and explore with it and use it as a launching,” he said.

Duncan added: “It demonstrates that you can do amazing things with relatively small models and resources. It shows that you can innovate without having the massive resources, say, of OpenAI.”