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Cryptos: War And Inflation Could Be Bullish Or Trigger Regulatory Tightening

Published 10/03/2022, 09:37
Updated 09/07/2023, 11:31

This article was written exclusively for

  • Cryptocurrencies are global assets
  • Governments could love to hate cryptos
  • Refugees may embrace cryptos
  • Hacking poses dangers
  • US executive order, expect lots of volatility

The last time there was a major war in Europe, there were no cryptocurrencies. Today, the alternative means of exchange provide people, businesses, and even governments transportability for their savings, assets, and reserves. While cryptocurrencies are highly volatile assets, they offer several benefits. Cryptos fly below the radar of governments, are semi-anonymous, transcend borders, and exist in cyberspace. A computer wallet can hold a small or massive amount of Bitcoin, Ethereum or a host of other cryptos.

After Russia invaded Ukraine on Feb. 24, the knee-jerk reaction in the cryptocurrency market was to move lower. March Bitcoin futures fell to $34,300, and March Ethereum futures dropped to $2,305.50 per token.

The two leading cryptocurrencies have combined market caps of more than 60% of the total value of the asset class. Although Bitcoin and Ethereum declined when the war first broke out, they made higher lows than the Jan. 24 bottoms and have recovered as the hostilities continued.

The US and Europe slapped Russia with sanctions on banks and businesses as punishment for the attack, and the Russian stock market and the ruble tanked after the sanctions. Meanwhile, cryptocurrencies could wind up helping some Russians and those fleeing war-torn Ukraine. If the war spreads, Bitcoin, Ethereum, and the more than 18,000 other cryptocurrencies could become popular assets, igniting the bull market that ran into a brick wall of selling after the most recent highs in mid-November 2021.

Cryptocurrencies Are Global Assets

Ideologically, cryptocurrencies reject government and central bank interference in money. Governments issue legal tender, giving them control of the money supply.

As we witnessed during the 2008 global financial crisis and the 2020 worldwide pandemic, countries worldwide pumped liquidity into the financial system via low interest rates and stimulus, amounting to running the fiat currency printing presses over time. Monetary and fiscal policies can expand or contract the money supply for political or financial agendas.

Governments have no say in cryptocurrency supplies as they transcend all borders and are global assets. The only comparison in the worldwide financial system is gold, as the only way to increase the gold supply is to extract more from the Earth’s crust.

Governments May Love To Hate Cryptos

Governments have not been thrilled with the growth of the cryptocurrency asset class and its ascent that took crypto prices to all-time highs in November 2021. While El Salvador adopted Bitcoin as its national currency, other countries have not followed.

Supranational institutions like the World Bank and International Monetary Fund frown on the crypto asset class, and they provide loans for many countries worldwide. However, countries that become international outcasts could turn to cryptos as they offer a volatile alternative to the fiat currency system. Last week, Coinbase (NASDAQ:COIN) and Binance, two of the world’s top cryptocurrency exchanges, rejected calls for a blanket ban on all Russian users despite Western sanctions. Kraken, another exchange, will not shut down Russian accounts. Meanwhile, the exchanges have blocked accounts of Russian clients directly sanctioned by the West, including the mega-rich Russian oligarchs.

Russian banks kicked out of the SWIFT system are likely looking at the crypto market as a possible transaction vehicle. However, many experts believe cryptos cannot help Russia avoid sanctions as the asset class is too small for the country.

Governments worldwide agree that cryptos could pose a threat if the asset class continues to grow at the rate over the past years. However, for Ukraine, cryptos have been a lifeline. Since the Russian invasion, millions in cryptocurrency donations have been flowing to the Ukrainian government.

Refugees May Embrace Cryptos

The Russian government and its network of oligarchs may not find cryptocurrencies liquid or fully anonymous assets to evade sanctions. However, the refugees fleeing for their lives can easily carry Bitcoin, Ethereum, and the leading cryptos that offer liquidity when ATMs and banks become unavailable.

While it may be too late for Ukrainians to convert savings to cryptocurrencies, other former Soviet satellites in the Baltics and Eastern Europe could see a surge of interest in cryptos as flight capital. Watching the Russian invasion is likely to cause many in the region to prepare for a similar fate. Refugees with no choice but to run for safety could carry cryptocurrencies on a flash drive or a secure password key in their pockets or sewn in their clothing.

Hacking Poses Dangers

Security remains a clear and present danger for those holding cryptocurrencies. Hackers are becoming more sophisticated, and individual hackers and government-sponsored hacking and cyber warriors can wreak havoc with accounts. In January, the BBC reported that North Korean hackers stole almost $400 million worth of digital currencies in 2021. In October 2021, Fortune reported that Russia accounted for most state-sponsored hacking detected by Microsoft, with a 58% share. Hacking is fast becoming a dangerous and effective cyber warfare tool.

US Executive Order, Expect Lots Of Volatility

The first Russian Soviet leader, Vladimir Lenin, said, “There are decades where nothing happens, and there are weeks when decades happen.” A few short weeks ago, few people believed that the world would face Russian aggression that caused the largest stream of emigration in Europe since WWII. Moreover, almost overnight, the world faces the increased potential of a nuclear conflict.

Markets reflect the economic and geopolitical landscapes. Inflation is at the highest level in more than four decades. A war is raging in Ukraine, and the US and allies have slapped sanctions on the Russians, which will only pour fuel on the inflationary fire. Markets across all asset classes have become volatile as uncertainty breeds price variance.

On Mar. 9, President Joseph Biden signed an executive order on ensuring “responsible innovation in digital assets.” The order acknowledged the growth of the cryptocurrency asset class and called for:

  • Protecting US consumers, investors, and businesses from systemic and other risks.
  • Protecting US and global financial stability.
  • Mitigating illicit finance and national security risks.
  • Protecting US leadership in technology, economic competitiveness, and the global financial system.
  • Promoting safe and equitable access to affordable financial services.
  • Supporting technological advances and responsible development of digital assets.
  • Exploring a US central bank digital currency.

Meanwhile, the burgeoning cryptocurrency asset class has experienced massive price swings. While the trends in Bitcoin, Ethereum, and the other more than 18,000 cryptos remain bearish since the Nov. 10 high, war and inflation may only cause governments to tighten the regulatory noose, furthering the ideological case for the asset class.

Expect lots of volatility in cryptocurrencies. On Mar. 9, they could be a lot closer to bottoms than tops as they could be safer than fiat currencies or other assets that have risen to untouchable levels over the past weeks. The security and custody issues could be worth the risk as the geopolitical landscape causes many market participants to lose faith in their governments.

In theory, Western sanctions on Russia and the war in Europe are bullish developments for the cryptocurrency asset class. Meanwhile, the US executive order is a move to control and manage the asset class, while the underlying ideology supports individuals instead of governments. Time will tell if the theory translates to another explosive rally.

Latest comments

Interesting article, thank you.
Tell it to my Indian Government and the Reserve Bank of India. They don't understand wee bit of crypto ledgers and want to dabble in fire. Let them learn a wee bit from El Salvador.
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