VegaX Flash News Report: Implications of War and the Crypto Economy — What’s Happening?

VegaX Holdings Flash News Report: February 2022 — Covering the geopolitical tensions between Ukraine and Russia, what War means for the Crypto Industry, and how this all may impact the future.

What’s happening:

A full-scale Russian invasion has left Ukrainians in turmoil as the Russian army marches into the country. There are thousands of casualties from both sides, uncertainty has forced the exodus of families from the country and has compelled the people who stayed behind to take up arms.
Financial markets worldwide haven’t been kind either, SNP 500 is down 10% from its recent highs and oil prices shot up 36% in reaction to the news at a point. The crypto market was no exception, with many major cryptocurrencies giving up their rally to fall 10–15%.

A little history lesson:

Financial markets have not reacted kindly to global geopolitical or environmental concerns in the past. Almost every global crisis historically has witnessed a downfall of major assets like stocks, commodities, and digital assets in the weeks leading up to the event or as a swift and immediate reaction.
We have two historical instances to assess today — The annexation of Crimea by Russia in February 2014 and news about the new omicron variant of the coronavirus in June 2021. As seen in the BTC/USD chart below, the two geopolitical events (marked with red arrow) and the omicron news (marked orange) were met with severe risk-off behavior by the investors.

The Players and Pawns:

To confabulate an explanation of how these events could shape the future of the crypto industry, we must understand the arsenal of economic weaponry being used by different actors to acquire the high ground.

The Russian economy is tied to the world

  • Exports: Russia is one of the largest producers and exporters of oil and natural gas, a position that has been notoriously used in the past to benefit from supply and demand. It is also among the largest exporters of fertilizer, iron, nickel, cooking oil, coal, and many other highly sought-after commodities.
  • Forex reserves: To reduce dependence on the US dollar, Russia’s central bank has acquired more than $600 bn worth of foreign reserves (40% of its GDP), held in mostly Euros or gold.

Leveraging US dollar dependent financial system against Russia

  • SWIFT is a global financial messaging system used by banks worldwide to communicate with one another for facilitating transactions. SWIFT manages an incredibly complex and interconnected web of banks around the world to direct the flow of money. More than 50% of all the transactions on the SWIFT network involve the US dollar, making SWIFT the most significant contributor to USD’s global status.
  • Sanctions: It is a giant naughty list of individuals and governments that have been banned from participating in the SWIFT network, which is almost equivalent to their complete financial isolation.
  • The use of sanctions against a whole of Russia would be an operational nightmare, but could effectively cut Russian export networks, its primary source of revenue.

Bitcoin donations are flooding in to support Ukraine

  • The Ukrainian military has received close to $4 mil in BTC donations to help their fight against the Russian troops. NGOs and volunteer groups have played a key role in raising these BTC donations.

Implications on the Crypto Industry

Sanctions: The double-edged sword

The use of sanctions to ban Russian entities from using SWIFT may hinder their war efforts in the short term but could raise dire consequences for the pristine status of the US dollar. Weakening the influence of SWIFT on foreign exchange may pave the way for other payment channels to fill the power vacuum.

  • The ban could push Russia to adopt the Chinese alternative to SWIFT (CIPS).
  • Being faster, more secure, and cheaper than SWIFT, blockchain-based payment networks have the potential to gain wider adoption in the future.
  • The sanctions could potentially initiate the de-dollarization of the world economy.

The case for CBDCs

As the domination of USD over the global money system withers with stricter sanctions. CBDCs and stablecoins may begin to be perceived as a new generation of assets for geostrategic significance in the future. China has already implemented a working CBDC architecture based on Yen. This puts Bitcoin in the spotlight for potential legalization in Russia.

Inflation, Equity and Bitcoin

The widespread adoption of digital assets and bitcoin has made its correlation with equity tremendously significant. Rather surprisingly, the price of bitcoin corrected significantly lesser than tech stocks in the US, indicating that destabilization of east-European countries may have been already priced in.

Narrative vs technical outlook

Investors make trades based on two broad aspects of the market — Narrative (fundamental) and Past performance (technical). While the former prioritises gut sentiment and qualitative factors influencing the market, the latter analyses past performance to deduce patterns.
Universal crypto adoption and perceived bearishness due to rising inflation are two opposing circumstances that may place fundamentalists in a neutral stance. If historical performance is the only benchmark measured, technical analysts would display risk-off behaviour. The tug-of-war between these two thoughts can also explain the recent volatility.

A rock and a hard place

If the Fed were to finance war efforts to hinder the Russian assault into Ukraine, it will very likely raise cash by hiking interest rates igniting an inflation spiral in an already beaten down economy.
On the contrary, if the government’s focus is on moderating inflation, the threaten US dominance in the future. When there is a choice between bad and worse, risk-on assets like equity, crypto does not fare well.

Conclusion

As the eastern European conflict becomes kinetic, western implications remain largely economic. The barbarous assault of Russian troops into Ukraine lays several lives and sends shockwaves of inflation over the world, making it a much more pressing concern than the price of BTC.
As every character in this landscape acts out of self-interest, the politicization of bitcoin and digital assets, its use to fund international conflict and challenge the backbone of the monetary supply chain raises more questions than answers.

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