This Week in AI: Market Meltdown Makes the AI Narrative Look Good

If you are like many traders this week, you likely experienced quite the shock when looking at your portfolio — but AI token holders may have suffered the least.

Since March, most AI tokens have been on a significant downtrend, with a brutal sell-off last weekend sending many AI tokens down to prices not seen since the start of the year.

Despite this, the sector is showing relative strength in a down market, with AI tokens holding up better than the average altcoin.

What’s behind the recent AI sell-off? Let’s find out.

TL;DR…

• AI Tokens Hold Strong: Despite a rough market, AI tokens have been more resilient than other altcoins.
• Market Chaos: Massive liquidations and global uncertainties, including Middle East tensions and Jump Trading selling ETH, drove market volatility.
• VC Confidence in AI: Big drops in tokens like RNDR and THETA, but strong VC funding signals long-term belief in AI growth.
• Positive Signs Ahead: New investment funds and potential Fed rate cuts could boost the AI sector and overall market sentiment.

So, What Caused It?

On Saturday, over $800 million in longs were liquidated — more than the previous three days combined.

This occurred alongside a more than 10% decline in Bitcoin and a 20%+ dump in Ethereum.

Is it over for Ethereum? Find out here.

Saturday’s price action was almost certainly caused by a perfect storm of negative events, with a confluence of macroeconomic uncertainty, rising war tensions, and instability in the Middle East leading to twitchy traders worldwide.

These factors are briefly summarized below:

1. BOJ curbs YEN slide against USD: On July 31, the Bank of Japan (BOJ) increased its short-term interest rate target to 0.25%. This led to a massive unwinding of yen carry trade positions, leading to a global equities sell-off.
2. Recession fears: Poor U.S. job data combined with a weakening Dow Jones led some to speculate that a recession is looming.
3. Jump Trading dumps ETH: Following a CFTC investigation, one of the largest crypto trading businesses sold over 100,000 ETH contributing to weak altcoin markets.

AI Market Meltdown

Over the last week, AI coins and tokens have taken quite the beating.

Per data from Messari, the entire AI sector is down 11.96% in the last 30 days, with major AI assets like Render (RNDR) and Theta Network (THETA) down 28.45% and 28.45% respectively.

Meanwhile, the Artificial Super Intelligence Alliance token, formed as a token merger between the now defunct Fetch.ai (FET), Ocean Protocol (OCEAN), and SingularityNET (AGIX), suffered its worst week on record, losing 31% in the last 7 days.

This comes alongside the weakening of NVIDIA Corporation stock which is down 20% over the last month. Nonetheless, it is among just a handful of stocks to outperform Bitcoin’s returns in the last decade.

For the last two years, altcoins have seen their market share erode against Bitcoin, with BTC alone now constituting 55.7% of the total crypto market capitalization. This is a value not seen since April 2021.

Despite this, VC funding in the sector remains strong, with many VCs betting big that AI will continue its meteoric growth in the future with firms like Polychain Capital, The Spartan Group, and Sequoia Capital allocating heavily into early-stage AI projects in recent months.

Keep an eye on your favorite AI coins here.

The Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla) — which count among the biggest players in the AI space — have locked in significant returns in the last year and managed to largely resist the crash last weekend.

Tensions continue to mount between X.com’s Elon Musk and OpenAI’s Sam Altman, with Musk alleging ‘deceit of Shakespearean proportions’. The lawsuit reaffirms more than 6 months of bad blood between the two AI pioneers.

A Few Things to Consider

Although it has been a tough few months for the AI sector, there are reasons to be hopeful.

On August 7, Grayscale, one of the largest digital currency asset managers, launched a new single-asset crypto investment fund for Bittensor (TAO) — the second largest pureplay AI cryptocurrency (behind FET).

The new fund will make it easier for traditional institutional investors to gain exposure to TAO through a simplified investment vehicle that takes away the challenges of asset management and secure storage.

Learn more about Bittensor in our full deep dive.

In an ideal world, this could shine a spotlight on the decentralized AI sector as a whole.

But that’s not all. If you think all of this market action looks strikingly similar to the 2020 COVID crash, you’re not alone.

In response to the crash, the FED cut interest rates to near zero and injected liquidity into the financial system. Some believe that a similar response may be on the horizon.

Indeed, Polymarket odds predict a 95% chance of rate cuts by September 18, with a 26% chance of 4 rate cuts this year.

Meanwhile, the dollar index (DXY) has been weakening, which is usually considered a bullish signal — since it typically leads to improved risk appetites and growth of inflation hedges (crypto included).

There’s also a slim chance that the FED will schedule an emergency, leading to accelerated rate cuts. Though Polymarket currents place this at a 4% chance.

Here’s hoping!

Still here? If you’d like your tea with a little more hopium — read our full breakdown of the recent market recovery.