How Will The Russia-Ukraine Conflict Impact Bitcoin?

How Will The Russia-Ukraine Conflict Impact Bitcoin?
Jonathan Hobbs

about 2 years ago5 mins

  • The geopolitical and economic environment is currently more favorable to “safer” assets, with investors more reluctant to take risks.

  • Bitcoin has not shown the characteristics of a safe haven asset so far in 2022, and high inflation doesn’t mean bitcoin must go up.

  • But given bitcoin’s finite supply, censorship resistance, and healthy hash rate, it makes sense to own some as a long-term investment if you can stomach short-term volatility.

The geopolitical and economic environment is currently more favorable to “safer” assets, with investors more reluctant to take risks.

Bitcoin has not shown the characteristics of a safe haven asset so far in 2022, and high inflation doesn’t mean bitcoin must go up.

But given bitcoin’s finite supply, censorship resistance, and healthy hash rate, it makes sense to own some as a long-term investment if you can stomach short-term volatility.

Back when Russia invaded Ukraine in February 2014, bitcoin fell into a bear market and stayed there for some time. But bitcoin was a far more speculative asset back then: today, it’s larger, stronger, and more accepted among institutional investors. So as crypto enthusiasts argue that the cryptocurrency should come into its own in these times of uncertainty and conflict, I wanted to look at whether they’re right.

What’s the appeal of bitcoin in wartime?

For starters, bitcoin’s a borderless medium of exchange, so it's not exposed to geopolitical risks in the same way as sovereign currencies. War or no war, bitcoin transactions will go through without a hitch. And since the blockchain is free of financial middlemen, banks can’t freeze funds either.

There’s also a good chance that the world’s governments could invoke further “emergency acts” in a modern war scenario, which could give banks and other financial institutions more draconian powers over their customers’ cash. That could encourage savers to adopt bitcoin as a means of wealth preservation.

What’s more, if geopolitical tensions confirm long-term holders’ beliefs that they should store fewer coins on exchanges and more in off-exchange wallets, they’ll arguably be less likely to sell them. That would be in keeping with the wider trend we’re seeing: more and more bitcoin has been moving off crypto exchanges since the pandemic-led selloff in March 2020, suggesting “HODL-ing” is on the rise.

Total number of bitcoin held on crypto exchanges. Source: Cryptoquant
Total number of bitcoin held on crypto exchanges. Source: Cryptoquant

Is there a risk to bitcoin mining?

Russian miners currently account for 11% of the bitcoin network, so yes: there’s arguably a risk here.

But if a Russian war scares miners off, odds are they’ll just pack up their machines and go somewhere else. Consider that China banned bitcoin mining in July last year, and that the hash rate of the bitcoin network – the amount of computing power that miners contribute to the bitcoin network at a given point in time – has more than doubled since then:

Total bitcoin hash rate. Source: blockchain.com
Total bitcoin hash rate. Source: blockchain.com

That’s significant: according to the Cambridge Bitcoin Electricity Consumption Index, roughly a third of all coins were mined in China before the ban. Since then, miners have just done what they do best: gone where the conditions are good to mine. Russian miners are likely to follow suit.

How will bitcoin hold up under extra inflationary pressures?

There’s been a lot of talk around the impact that Russia – the world’s third-biggest oil producing country – will have on European energy prices, and what impact that will have on a region already struggling with sky-high inflation.

Things are less cut and dry for bitcoin on that front – at least in the short term.

On the one hand, bitcoin is a scarce digital commodity with a fixed supply: only 21 million coins will ever exist, with 90% of them already mined. And since the block reward of new coins going to miners halves every four years, the supply of bitcoin increases at a decreasing rate. The supply of fiat currencies, meanwhile, is increasing at an increasing rate:

M2 Money supply of US Dollar. Source: Us Federal Reserve via Tradingeconomics.com
M2 Money supply of US Dollar. Source: Us Federal Reserve via Tradingeconomics.com

With that said, I think we can all agree that 90% of all dollars have not yet been printed. Based on bitcoin’s scarcity versus fiat currencies, basic economics suggests that the cryptocurrency could turn out to be a sound inflation hedge over time.

So what’s the catch?

Like it or not, the market still sees bitcoin as a “risk-on” asset – one that tends to go up in more stable market environments where investors are more inclined to take risks. As of right now, we aren’t in a stable market environment – far from it. And so far this year, we’ve seen bitcoin behave more like the NASDAQ than traditional safe havens like gold and the US dollar.

Bitcoin price (blue) vs. gold (yellow), US dollar Index (red), NASDAQ (green). Source: TradingView
Bitcoin price (blue) vs. gold (yellow), US dollar Index (red), NASDAQ (green). Source: TradingView

In the bitcoin community, the popular narrative is that it’s the ultimate safe-haven asset. In this regard, bitcoin should be viewed as “digital gold” rather than as a speculative growth play. But as the above chart shows, we seem to be a long way off from that right now. Until the digital gold narrative is adopted by the rest of the market, bitcoin is unlikely to do well as a war hedge.

It didn’t exactly cover itself in glory as a Covid-19 hedge, after all: bitcoin – like most markets – took a dive as pandemic panic escalated, with its price down over 50% at one point in March 2020. And sure, bitcoin had an incredible rally after that, but investors did have a lot of extra liquidity to play with. The US Federal Reserve has undergone more quantitative easing since March 2020 than it did between 2008 and 2020, and other central banks around the world weren’t shy about firing up their money printers either. With so much spare cash floating around, it’s no wonder bitcoin did so well.

Now, though, the printing and low interest rates can’t continue, which means there’ll be less free liquidity around to pump the bitcoin price. So while inflation might be a good reason to hold bitcoin for the long term, it might not do much for the cryptocurrency’s price this year.

So where does that leave us?

Regardless of how this year unfolds, I believe there’s a strong case to be made for holding bitcoin as war descends on Ukraine. Bitcoin is down nearly 50% since November last year, and given its history of rallying when nobody’s looking, it makes sense to own some in case the more bullish scenario does play out. Yes, its price is volatile and it can certainly go down more in the short term. But bitcoin’s volatile nature goes hand in hand with its potential for large returns.

That said, there are two simple ways to hold bitcoin without taking as much risk. The first is diversification. By not putting all your eggs in the bitcoin basket, your portfolio is more protected from bitcoin bear markets. Dollar-cost averaging into bitcoin – i.e. periodically investing portions of your overall total – is also a great way to reduce the downside. By investing small sums often rather than a large sum all at once, you’ll iron out a lot of volatility.

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