Last Two Weeks in Crypto

I discussed the implications of the Ukraine invasion on the market for trading Bitcoin while also addressing the incorrect claims of Bitcoin being used to avoid sanctions.

Read the video transcript

So it’s Friday afternoon here in sunny Miami. As we look back on the last couple of weeks in Crypto to highlight what’s been going on in the market that we at coin routes follow. Before I begin, it is obvious that the most important thing going on on the planet is the human toll being taken in Ukraine. Russian army blowing up nuclear plants, destroying the world’s largest plane, terrifying footage, all sorts of stories. There is simply nothing that will overwhelm that in terms of context.

But that is our job, to understand how this affects markets and understanding how it affects our industry. So let’s talk about it. Well, the reality is, as we sit here today on a Friday afternoon, the markets are selling off and they’re selling off hard. And why is that? Well, the honest answer is all risk assets are being sold. There is fear and there is fear of disruption in the financial system that we haven’t seen since the onset of the pandemic. What is causing this fear? Well, the cause is straightforward. When you implement sanctions to cut off a sovereign nation from the financial system, one with significant economic relationships, what does that mean? The other side of trades, the other side of that trade with the Russians is going to be impacted.

There are rumors of European banks that might be going bankrupt. I don’t know if any of that is true. There are certainly stresses in the financial system, and that I do know is true. Spreads that are that people watch in the yield markets are blowing out to levels that we haven’t seen since March of 2020. Is this, as some commentators suggested, a potential Lehman weekend? I don’t think so, but you can’t say that it can’t happen. As a result, selling on Friday to make sure that one’s exposure is not high to this market is not all that surprising. So bitcoin now under 40000, the SP and Nasdaq selling off as well. It’s not going to surprise many people. But let’s look at bitcoin, because one of the things that has been said by many is bitcoin is an asset that should thrive in this sort of environment.

After all, it’s a hard asset. It is scarce, it is digitally and computationally scarce. And we know there will only ever be 21 million bitcoin. But the reality is, today it trades more like a risk asset. What do we mean by that? Well, if you look at the people who buy and sell bitcoin, there’s really two groups. There are speculators who are betting in the short run, it’s going to go up, it’s going to go down. They tend to price the asset at the margin. They’re the most active traders, they’re the ones who are going to set the price. Then there are the hodlers, the long-term holders.

What’s interesting is the on-chain metrics suggests that the holders or the Hodlers are at all-time highs. Somewhere over 76% of all bitcoin wallets haven’t moved Bitcoin in over six months. The length of the wallets themselves is also towards the all-time highs. So what you have is a push pull. You have the believers are holding and the speculators are trading and therefore trades like a risk asset. Are there more believers today than there were six months ago? Or a year? I suspect yes. Will there be more in the ensuing weeks as the dust settles from the geopolitical maelstrom that we’ve been living in? I’m almost certain yes, because a non-confiscatable asset has gained increased importance. Last time we talked about Canada and what that meant, but this time we have a situation where sovereign reserves, where central bank reserves held the US Federal Reserve, are no longer considered to be reserves by the Russian central bank. Now it may be that all the other central banks in the world will look at this and say, well, I’m not going to bomb anyone, so maybe we’re safe, but more likely it will be central bankers will say, hmm maybe I need hard assets instead of just holding on to dollars in somebody else’s account because all dollars are essentially a liability of the US government. That’s important. And the Wall Street Journal had a really good editorial about this, saying this could be the final or at least the beginning of the end of dollar hegemony worldwide.

I don’t know if it’s that grand, but the reality is bitcoin should ultimately get a boost from that. In the short run, not so much. So the marginal buyers or sellers are selling, the market is going down. But if you look at it in the zoom out, you see we’re basically back towards the middle of the trading range. We have a trading range from the low 30s to the mid 40s. Now we’re back to the high 30s. So what in the technical side of it? Really there hasn’t been a lot that’s happened. But more interesting with Bitcoin has been the political response. And I want to specifically focus on the response of people spreading doubt. And the new fud is bitcoin can be used to evade sanctions. It’s helping criminals and terrorists. Well, that’s a bunch of nonsense. It’s been the primary champion of this has been Elizabeth Warren, and she’s made this statement, she’s retweeted articles, etc. The reality of the situation is somewhat different.

We are quite certain that Bitcoin can’t be used by large state actors or for substantial sums of money to get back and forth into the banking system. Because all of those rails as run by the exchanges, the major ones, are not operational. They’re not allowing that money to go back and forth. So it’s not really a state government action. And those wallets, by the way, can be traced. Firms like Elliptic and Genalysis are very good at doing that. So it’s extremely unlikely that that is something that will be used for breaking sanctions. But what can it be used for? Well, there are two uses that are showing even more importance as to why bitcoin is important. Use number one philanthropy. We have seen an enormous amount of money donated that we know to the central Ukrainian relief funds. Somewhere estimates are over $50 million donated in bitcoin, 5 million in polka dot, etc. But we also know that people are sending money in bitcoin to people on the ground, and that’s peer-to-peer, so we have no real way of knowing the amount, but it’s obviously important.

Second use case. There are people in Russia who probably don’t agree with the government. May or may not, we don’t know. But they’re the average everyday people who are seeing the value of the ruble collapse before their eyes and are using bitcoin to preserve their wealth. That is very interesting. It is not avoidance of sanctions. What it actually means is exactly the opposite. If, for example, 100 million russians took all their rubles and converted it to bitcoin, the value of the rubble would plummet. Now, I don’t expect that to happen, but the reality is, is the more people believe bitcoin is a better store of value than the ruble, the less valuable the ruble will get, which is the goal of sanctions. So in essence, bitcoin being used for what bitcoin is most used for, a store of value, is likely to actually help the efforts of the allies to impose sanctions upon the Russian people. Very different than the political narrative.

Where does that leave us? It leaves us in an uncertain state. The market is certainly vulnerable to weekend jitters, but if you think about it on the long term, I think the crypto markets in bitcoin in particular has a fairly good outlook when you zoom out to a longer time frame.

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