The Fog of War: Three Themes Crypto Investors Should Pay Attention To Now
March 4, 2022
“War is the realm of uncertainty; three quarters of the factors on which action in war is based are wrapped in a fog of greater or lesser uncertainty” —Clausewitz
The unspeakable violence and aggression that Russia has unleashed against Ukraine and its people is the first all out “hot war” invasion in Europe since WWII. Fallout is being felt across the global economy, roiling markets and causing many investors to seek relative shelter amidst the volatility. As with any global crisis, it is also a moment of uncertainty and unease for many market participants. There are three key themes crypto investors should be paying attention to over the coming weeks:
1: The power of decentralization of crypto comes into focus
Since its debut in 2009, Bitcoin has been heralded as a self-sovereign alternative to government controlled fiat. Citizens of countries with hyperinflationary environments, capital controls and monetary policy that negatively impacted the populace (ie, India’s demonetization in 2016 which deemed certain notes illegal practically overnight) have often turned to Bitcoin as a relatively safe haven for their assets. In the United States, the COVID crisis and ensuing monetary policy highlighted the benefit of holding Bitcoin as a self-sovereign store of value and hedge against inflation. The decentralization that is at the core of cryptocurrency has come into sharper focus over the past weeks. Yesterday, Infura, a cloud -based node network for Ethereum, cut off access for wallets in Venezuela and quickly reversed course blaming the outage in code that was implemented to comply with sanctions against Russia. Many crypto purists pointed to this as a problematic byproduct of centralization when a company is able to implement changes to the code unilaterally. Crypto exchanges debated where they would draw the line with government requests. This debate will continue in the coming weeks and will impact what is built in the blockchain sector going forward.
2. Bitcoin becomes the compelling “risk off” asset
Closely related to point number 1, while we’ve seen tests of Bitcoin’s above narrative over the past 10 years, the Russian invasion of Ukraine has brought it to the forefront. With rapid global moves in response to this crisis, and highly volatile global equity markets, Bitcoin over the past days has decoupled from these markets to become a “risk off” asset. We’ve seen a stronger demand for Bitcoin in Russia and Ukraine, with Bitcoin’s price at a low of $34K a few weeks ago increasing to over $44K over the past before retreating to $41K currently. While much analysis will be done in the coming months on where demand has actually come from, there are several potential reasons.
Russian citizens have been cut off from global banking via SWIFT bans
The cut off of Russia’s Central Bank from global markets, cutting off access to foreign reserves,
Citizens elsewhere continue to exhibit concern about global banking disruptions,
Professional and non-professional investors are turning to Bitcoin for a (larger) percentage of their assets as an overall hedge as the war creates supply chain disruptions leading to higher inflationary fears.
3. What to watch in the coming weeks ahead
Other than Bitcoin’s narrative solidifying, this crisis has other implications for digital assets:
– CBDCs (Central Bank Digital Currencies) – we may see accelerating momentum for the development of central bank digital currencies to create regional settlement networks instead of reliance on a more centralized system and less dependence on the dollar (as evidenced by what China has been doing for the past couple years).
– We will see even more institutional adoption of digital assets. Recall that back in 2017, the total market value of all cryptocurrencies was around $100 billion, and by the end of 2021 it passed $3 trillion. The Ukraine crisis will have a force multiplier effect on this trend.
– Here come the regulators: expect to see increased discussion and scrutiny of crypto as concerns mount (founded or unfounded) around the ability of bad actors to use crypto as a workaround to sanctions. We are already seeing increased scrutiny in Congress and calls for OFAC to come up with stronger procedures on KYC. Watch this space.