How Will War Affect Crypto Prices?

Indeed, cryptocurrency trading volumes involving the rouble recently hit highs of $141 million, a three-fold increase from just before the start of the war.

 

But will the conflict finally put blockchain-based currencies permanently on the global map, or does renewed focus on the technology threaten its very existence?

 

The narrative surrounding Bitcoin has always been mixed: many of its supporters believe it’s the future of money, whereas some of its most vociferous critics – including Warren Buffett and Charlie Munger – see it as a “noxious poison” and want it banned.

 

But the high-visibility of the war in Ukraine has shown to the world that cryptocurrencies certainly have a use case. For Russians, Bitcoin and other digital securities have made it easier to shield their wealth from the prying eyes of international government agencies who’ve imposed economic sanctions on their country. It’s also a good way to protect their savings from the brutal inflation and devaluation of the Russian rouble that’s currently taking place.

 

On the other hand, Ukraine too has discovered the value of cryptocurrency in raising funds for its cause – as well as the ease with which those funds can be delivered from their source to those who need it most in the country.

 

However, one of the problems this might cause is an increase in regulation. The global financial system has targeted certain Russian individuals and institutions with sanctions, and it intends to enforce those sanctions come what may. If these punitive measures can simply be sidestepped with the use of Bitcoin – or more likely Monero, a privacy-enhancing decentralized cryptocurrency that is notoriously difficult to trace – then it’s very possible that national governments will look to regulate the crypto space in the near future.

 

Although the Russo-Ukrainian War has been ongoing since February 2014, it was mainly centered around the Donets Basin and the Crimean Peninsula. That all changed on February 24, 2022, when Russia escalated matters by initiating a full-scale attack on Ukraine from the north, east and south of the country. 

 

When the latest phase of the conflict began, crypto-watchers were curious to see how Bitcoin, the leading digital currency with the highest market capitalization, would perform.

 

Surprisingly, perhaps, BTC actually fell, losing 8% of its value to trade at a low of $34,300. The coin recovered over the course of the next few days, reaching a high of $44,400 on March 2. At the time of writing, Bitcoin currently changes hands for $38,300 a piece.

 

The fundamentals affecting the price of Bitcoin and other blockchain-associated currencies are said to make the asset a suitable store of value in times of crisis. The argument goes that Bitcoin is a credit free, policy-insulated security with a limited supply, making it a kind of digital analogue to real-world gold. 

 

But the truth may be rather different: it looks increasing like the currency is more positively-correlated with risk-on securities – such as stock market shares and high-yield bonds – which undercuts the digital gold idea somewhat.

 

This isn’t necessarily to be unexpected; BTC’s price is itself highly volatile, and shouldn’t be thought of as a classic safe haven asset like U.S. Treasuries and defensive stocks.

 

Even so, the benefits of using cryptocurrencies in a scenario such as the Russia-Ukraine conflagration are compelling. In fact, Bitcoin’s limited liquidity could cause the cryptocurrency’s price to rise exponentially in the coming months, as an injection of cash into the digital ecosystem drives demand amid an environment of severe scarcity.

 

It’s been a dream of crypto-enthusiasts for a long while that digital blockchain currencies could one day be used as a form of payment in just the same way as cash and credit card transfers do today. However, the limitations of the technology – and its lack of widespread adoption – have curtailed that aspiration, and its status as a regular method of payment has often seem quite far off.

 

That was until now. As mentioned earlier, the Ukrainian government has formally raised funds through Bitcoin donations, and news of this made headlines around the world. Cryptocurrencies seem much less of a fringe hobby than they did a few years ago.

 

In addition, crypto is now being seen as a viable alternative to traditional finance, especially in conflict zones where the fiat money system has ceased to function. In Venezuela, for instance, the nation recently suffered a political crisis, leading to hyperinflation and a raft of socioeconomic issues such as starvation and disease.

 

In the wake of this, crypto-mining in the country exploded, with the president, Nicolás Maduro, attempting to introduce his own cryptocurrency, the “Petro”, to get around the financial blockade imposed on his nation by the US.

 

It’s very possible that reliance on cryptocurrencies will increase as the world becomes more unstable. The crisis in Ukraine came as a surprise to many, and that conflict is just one example of geopolitical tensions at work today. The ongoing issue of Taiwanese sovereignty could be the next global flash-point to ignite, bringing the issue of crypto-legitimacy into stark focus once again.

 

When it comes to thinking about cryptocurrencies, it should also be remembered that these assets are not only useful for speculative purposes either. For instance, stablecoins – such as Tether and USD Coin – can be utilized by individuals and corporations that want to store some or all of their money on the blockchain, without having the risk that their assets will fluctuate in value.

 

Cryptocurrencies have become so ubiquitous recently that the ministry of Digital Transformation of Ukraine was able to buy military gear directly from suppliers, using the Bitcoin and Ether sent to it via the Crypto Fund of Ukraine.

Indeed, $15 million worth of equipment has already been purchased, including night-vision devices, medical supplies and food. Some of the donations were even in the form of especially valuable NFTs.  

 

However the future pans out, it seems that cryptocurrencies will have an increasing role to play no matter what happens. Their presence in an active war-zone might not be the first, nor last, surprising use that this versatile asset class has to offer.