Why the Ukraine war is such a boon for crypto
The ascent of cryptocurrencies is being accelerated by the Russian invasion of Ukraine. To some, that means crypto’s time has come.
After dropping on the initial news of the conflict, crypto has bounced back stronger than other risky assets. In the past month, the prices of the biggest digital coins, bitcoin and ether, have risen more than those of gold or the US dollar index, while the S&P 500 has fallen, according to CoinDesk.
Recent events are “a validator”, said Rance Masheck, CEO of data provider iVest+ in San Francisco. “There’s a strong chance this will increase adoption.”
Crypto is having its “Zoom moment”, according to Masheck. Just as video conferencing became ubiquitous when the pandemic hit, digital assets are now becoming normalised as a result of financial sanctions and the instability of state-backed currencies.
READ Ex-US Treasury adviser tells crypto firms Russia will attempt to evade US sanctions
Crypto markets became more popular as citizens tried to get their money out of the banking system before it was frozen. There’s been a leap in demand for bitcoin in Ukraine and Russia — trading volumes from the two nations’ currencies into bitcoin climbed more than 270% on 24 February.
Fears are also growing about the use of crypto in the war — to fund the conflict, launder cash and help the Russian government evade sanctions, albeit on the margins.
The rest of the world has also taken note.
“The war on Ukraine has triggered a massive, urgent appeal for protection against some fiat currencies,” said Edward Moya, senior markets analyst at Oanda in New York. “That’s the case not just of Russia, but many emerging markets.”
The resilience of digital currencies is a break from recent form. Crypto posted strong gains during the pandemic as central banks and governments pumped money into the global economy. The gains encouraged institutional investors to buy in, giving trading more stability.
Institutional clients traded $1.14tn worth of cryptocurrencies on the Coinbase Global exchange last year, up from $120bn in 2020 and more than twice the $535bn exchanged by retail investors.
But digital coins took a beating at the end of 2021, when it became clear that inflation was picking up more strongly than expected and central banks would have to be more aggressive about tightening policy.
And when Russia invaded Ukraine, the crypto market dropped. The surprise is how strongly it has bounced back. “It’s weird to say crypto is a flight to safety,” Masheck said. “But compared to a collapsing economy, it might be.
The surge in transactions is creating two tests for digital coins, he said. The first is whether transactions remain secure, which would show that crypto provides a viable way to exchange. The second is whether the plumbing of the system can handle big increases in volume. If it can, adoption will become even more widespread, he said.
People may try to use crypto to get around the sanctions imposed on Russia by the international community. Changpeng Zhao, the CEO and founder of crypto trading platform Binance, rejected calls to block the transactions of Russian users.
It is also possible crypto will be used instead of the SWIFT payments messaging system, from which Russia has been cut off. But it is still far too clunky to replace it and the sanctions will still bite, Masheck said.
Another knock-on effect may be an acceleration of crypto regulation. Bank of England governor Andrew Bailey has long warned that crypto investors stand to lose all their money, but authorities are only now starting to crack down on fraud and misleading advertising.
READ Russia-Ukraine tensions are a test of crypto’s mainstream adoption
“There’s never been a more important moment in the crypto industry in compliance, to make sure that we have the controls in place to mitigate the risk of illicit actors,” said Ari Redbord, a former US Treasury adviser.
Big risks remain for the outlook for crypto. US Federal Reserve chair Jay Powell said last week that the Ukraine invasion is a “game changer” the consequences of which are still unknown. As energy prices surge, inflation may prove hard to control. Rapid interest-rate rises surely wouldn’t help the sector.
“If there is a major round of risk aversion, the first thing that is going to get sold is crypto,” said Oanda’s Moya.
But for now, investors seem to be reaching for digital assets. “The crypto trade has shown there’s steady interest,” Moya said. “The war in Ukraine has provided a catalyst.”
To contact the author of this story with feedback or news, email Brian Swint
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