Note: This blog is written by an external blogger. The views and opinions expressed within this post belong solely to the author.
While the human cost is undeniable, the war also entails significant economic implications, including infrastructure damage, a decrease in the working population, inflation, shortages as well as an increase in debt.
War may appear to be advantageous to businesses in terms of stimulating demand, generating employment, stimulating innovation, and increasing profits from certain angles (especially when the war occurs in other countries.) The “broken window fallacy” must be taken into consideration when discussing the “economic benefits” of war. Spending money on war creates demand, but it also represents a significant opportunity cost: instead of building bombs and rebuilding destroyed towns, we could have used this money to improve education and health care.
That being said, one of the sectors that have been affected heavily is definitely investments. Both traditional as well as cryptocurrency markets have taken a hit. Following Thursday’s market decline, Bitcoin, Ethereum, and Solana all fell in tandem with the market’s collapse, resulting in losses for cryptocurrency investors as well.
The intimate relationship between cryptocurrencies and the stock market, which was long assumed to be separate, is becoming increasingly apparent, and the situation in Ukraine is the latest indication that digital currencies such as Bitcoin are not completely isolated from the real world.
Crypto Markets Crumble, but why?
After the news surfaced that Russia had invaded Ukraine, many investors rushed to shift their wealth to more secure locations, causing the stock market to fall. As soon as trading began on Thursday morning, all three main U.S. stock indexes plunged more than 2%, compounded by a spike in commodity prices.
Gold has traditionally been a safe haven for investors in times of uncertainty, but cryptocurrency enthusiasts argue that the currency’s capacity to decouple itself from financial markets makes it ideal to invest in when other markets are unpredictable.
However, gold is performing exceptionally well at the moment, while Bitcoin and other cryptocurrencies are falling at a rate quicker than the stock market. Does that mean cryptocurrencies, especially Bitcoin, failed to deliver on their promise? Not quite. There’s more than what meets the eye.
Sam Bankman-Fried, the CEO and founder of a prominent cryptocurrency exchange, tweeted that algorithmic trading is a major reason for the decline in cryptocurrency prices. The trading of cryptocurrencies by algorithms is based on predetermined instructions for computer programs. Existing data, such as stock market movements, tends to constitute the basis for these algorithms. In the midst of the Ukraine crisis, every investor is selling, and the stock markets are all pointing lower, causing a drop in cryptocurrency that is on par with the dips in more traditional financial assets.
Bitcoin and traditional stock markets have been moving in unison for a long time now. As Federal Reserve measures such as rising interest rates have encouraged selloffs of both digital and physical assets, the stock market’s dismal start to 2022 was mirrored by an equally bad drop for Cryptocurrencies like Bitcoin and Ethereum.
Cryptocurrency’s performance is becoming more closely related to the performance of key indexes and other mainstream financial assets as more financial institutions begin offering digital asset lending services.
“Prior to the pandemic, Bitcoin and other digital assets showed low correlations to traditional financial market variables—in effect, crypto behaved as an entirely different ecosystem,” Zach Pandl, co-head of foreign exchange strategy at Goldman Sachs, told the Financial Times in January.
“But over the last two years, as Bitcoin has seen wider mainstream adoption, its correlation with macro assets has picked up.”
What should cryptocurrency investors expect?
While it may appear that the situation in Russia and Ukraine has nothing to do with cryptocurrencies at first glimpse, this is not entirely true. Even if the situation worsens, the majority of digital tokens would not be affected in any way.
Although many investors choose to place their money into assets that offer greater stability and security when the general environment appears to be too risky. The “risk-off” trade is the term used to describe these trades.
After the intensification of Russian-Ukrainian relations in late 2021, a risk-off scenario was already in motion. It’s why growth stocks and cryptocurrencies have taken a beating recently.
On the other hand, investors may be particularly concerned about the possibility of a conflict that degenerates into violence. Economic sanctions and escalating global tensions could have a negative impact on the situation.
In a fully-fledged risk-off market, not every cryptocurrency will bring the same amount of agony for investors. Some of the most popular and widely used cryptocurrencies, for example, are unlikely to decline dramatically.
Even if many digital tokens fail, Bitcoin and Ether are expected to fare better. Based on market capitalization, these are the two biggest cryptocurrencies. The widespread use of Ethereum’s blockchain to support smart contracts means that it may serve as a safety net in the real world.
Meanwhile, tokens like Shiba Inu, one of the most popular meme coins, is unlikely to do as well as Bitcoin and Ether. Meme coins that aren’t as well-known could be hammered much harder.
Is there any cryptocurrency that appears to have a reasonable chance of surviving the turmoil? Yes, in fact. Stablecoins are currencies that are tied to fiat. They are purpose-built to have relatively steady prices (hence the name).
For instance, there has been little movement in the price of Tether over the past few months while other cryptocurrencies have plummeted. Tether is an Ethereum-based stablecoin pegged to the U.S. dollar.
There is, however, a risk that even stablecoins aren’t immune to. Previously, Tether has come under scrutiny because of worries about its balance sheet and assertions that U.S. dollars entirely back its digital currency.
Investing lessons from risk-off circumstances in the past can be quite valuable for investors now. For starters, they’re not here indefinitely. In addition, they can offer fantastic purchasing opportunities for assets that are well-positioned to make a significant comeback.
Investors will undoubtedly have drastically divergent views on which cryptocurrencies will make the biggest comebacks when the crisis is over. However, there’s a fair argument to be made that cryptocurrencies with catalysts on the way are the ideal ones to buy.
As an example, Ethereum’s big upgrade, officially known as Ethereum 2.0, is set to continue this year. Meanwhile, the Shibarium layer-2 solution is eagerly anticipated by Shiba Inu investors.
Meanwhile, Crypto continues to remain a key variable amidst rising tensions
An IT specialist in the Ukrainian capital of Kiev has raised $400,000 in bitcoin donations to help the country’s armed forces.
Western cryptocurrency activists are calling for mobilization in support of the Ukrainian people. Some fear that Russia may try to bypass Western sanctions by using virtual currencies like bitcoin.
Because of Russia’s President Vladimir Putin’s military incursion into Ukraine, two economies that have been pioneers in adopting the new form of digital money are now relying on it to gain an advantage in the next geopolitical conflict. A new technology that can easily transport billions of dollars across borders is available to both sides for the first time ever as the crypto era’s first major battle unfolds.
Speaking on the matter, Tom Robinson, chief scientist and co-founder at the crypto analytics firm Elliptic noted:
“Because there is no central controller who can impose their morals on its user, crypto can be used to crowdfund for the Ukrainian army or help Russia evade sanctions. No one can really prevent it from being used in either way.”
However, it’s yet unclear how much of an impact it will have on the war. In the face of an outnumbered Ukrainian army that got $650 million worth of American weaponry in the last year, donations of a few hundred thousand dollars in bitcoin may not signify much.
Russian crypto activity has always been insignificant compared to the volume of traditional financial transactions. According to a recent report by Chainalysis, the blockchain data organization, ransomware attacks generated $400 million worth of cryptocurrencies in Russia last year, accounting for 74% of the global ransomware earnings. However, the U.S. Treasury Department estimates that Russian financial institutions trade $46 billion in foreign exchange each day.
Both parties have extensive ties to the crypto sphere. Chainalysis rates Ukraine as the top European cryptocurrency adopter and the fourth-largest worldwide. A new Ministry of Digital Transformation has issued recruitment video advertising for tech start-ups that may use cryptocurrency, following the country’s legalization of crypto in September after years of uncertainty.
After Russia started an attack on Ukraine on Thursday, a number of Western crypto activists issued a request for donations in support of Ukraine. One of the best things we can do as an industry, according to Messari’s Ryan Selkis, is figuring out how to help the Ukrainian people and their resistance using crypto contributions.
As Chainalysis points out, Russia has become a center for illegal cryptocurrency activity, including ransomware attacks and cryptocurrency-based money laundering. Over the past three years, Chainalysis discovered that Moscow City, the financial area of the Russian capital, has been the source of $700 million worth of digital assets from criminal organizations. This indicates a feasible way for businesses to circumvent sanctions.
However, it’s not apparent if it’s even necessary. Because the Biden administration’s new sanctions target banks and do not encompass energy payments, some of Russia’s largest firms do not yet need to use the dark web of crypto payments.
According to experts, if they did, crypto would not be as appealing as it appears.
In addition, some Russian figures are calling for tighter internal control over cryptocurrency. Alexander Shokhin, the chairman of the business group the Russian Union of Industrialists and Entrepreneurs, made the case to Putin on Thursday that the government should “institute effective regulation of digital financial assets and cryptocurrency” in order to minimize “external financial risks.”
Meanwhile, Coinbase, the largest U.S.-based crypto exchange, says it is taking a variety of steps to protect its customers, including restricting IP addresses in sanctioned countries and engaging with intelligence analysts to monitor “threat actors and their networks,” a company spokeswoman said in an emailed statement. As this war evolves, “We remain vigilant to ensure we are playing our part and meeting our obligations in the context of this rapidly evolving conflict.”
A conflict of this magnitude has never occurred in the history of crypto. There is still a lot of hope and optimism in the digital asset sector as it matures. To deliver bitcoins to soldiers on the front lines has a particular charm for those who are proponents of crypto. However, there’s still a long way to go before cryptocurrencies take the lead. However, despite the ongoing war’s potentially devastating effects, cryptocurrencies continue to draw the much-needed attention that could potentially turn out to be fruitful in the long run.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn’t represent any investment advice or WazirX’s official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.