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- James Butterfill is an investment strategist and Christopher Bendiksen is the Bitcoin research lead at the major European digital asset investment firm ** CoinShares.*
Bitcoin (BTC) had an immediate price reaction to the invasion of Ukraine when the news broke early this morning. It has been shown that Bitcoin is currently behaving as a risk investment and prices are falling below the technical resistance levels of the 50-day and 200-day moving averages. This has been a perfect storm for Bitcoin due to the combined threat of interest rate hikes in the major economies, numerous regulatory proposals and now geopolitical instability in Europe that has shaken global markets and reduced Bitcoin prices by 23% since the beginning of the year. However, we do not believe that this will change the long-term supportive fundamentals for Bitcoin.
Bitcoin’s liquid identity
We know that the identity of Bitcoin, that is, the prevailing narrative that drives prices at any given time, remains very fluid. Currently, the prevailing narrative is driven by risk- and interest-sensitive speculators, and Bitcoin is now moving in a similar way to other risk assets. This does not detract from its properties as a real good, which we have discussed in detail here.
It is clear to us that Bitcoin is still in the process of establishing its identity, and this is a process that could take decades. It can be assumed that during this period, different people will use Bitcoin for different purposes, based on their own needs and the monetary characteristics offered by Bitcoin.
As we have already written, some of the fixed characteristics of Bitcoin, such as its limited supply and its resistance to confiscation, make it very suitable as a safe haven in the long run. However, this does not mean that everyone will use it for this at any time. Each freely available asset with many beneficial properties is used by different users for different purposes.
While some users are probably currently using it as a long-term store of value and a safe haven, many other users may not be able to. And at the end of the day, what we are probably seeing now is a signal of the proportion of current users who use it as long-term savings and safe haven, compared to users who use it as an object of financial speculation.
While Bitcoin remains in its monetization phase, it is not surprising that speculators are heavily involved in trading and liquidity provision, and they will not necessarily use Bitcoin for any of the uses that make its characteristics the most suitable. You will probably use it as a risk investment rather than a safe haven, as you will make money by taking risks if you accept it as global money in the future.
Bitcoin – the stateless asset, a double-edged sword
Hiding in the reeds here are some other important macro events that are very favorable for the future launch of Bitcoin. As a perfect example, at this moment we see how the Trudeau regime is arming the Canadian banking system against its own citizens. This is a brutal and surprising demonstration for millions of people that the domestic political situation, even in supposedly liberal Western democracies, can quickly deteriorate to the point of suspending the constitutional protection of individuals and governments co-opting banks to attack their political enemies. A separation of money and the state is clearly for the benefit of citizenship in such situations.
But Bitcoin, as a completely independent stateless asset, is, of course, a double-edged sword. If someone can freely access a monetary system, it means that your enemies can too. Under a global order that is essentially enforced by the dollar-based global monetary system as an important tool in the diplomatic toolbox, the ability of unfriendly states to access alternative money channels is a problem.
One wonders if the invasion is the first hard signal that the sanction period of political pressure is over. If a leader like Putin, even under the threat of the strictest possible sanctions, will still invade another sovereign nation, then what power do sanctions still have?
The theory of money games also seems unfavorable for the Western powers. Of course, after his geopolitical opponents have been rather liberal with sanctions in recent decades, they have been looking for workarounds. It is not difficult to imagine that at some point the constant costs of sanctions for participating in the dollar-based global monetary system will outweigh the costs of its complete abolition. The more severe sanctions are imposed on a nation, the sooner this flip will occur. The Central Bank of Russia is well advanced in its work on the practical implementation of a digital ruble.
The Western powers must now draw a seemingly incredibly thin line: apply sanctions too loosely, and Russia will ignore them and not assess their costs sufficiently to outweigh the benefits of an invasion. Applying sanctions too strongly, and Russia could consider participation in the dollar-based monetary order itself too costly and look for an alternative.
If this happens, it would not only greatly affect the future power of the sanctions instrument, but also weaken the global network effect of the US dollar itself, reducing its usefulness and, as a result, its value as money.
Bitcoin and mining to circumvent sanctions?
Iran is a good example of how sanctions on oil exports have been circumvented by selling its energy reserves on world markets and effectively using Bitcoin mining to circumvent trade embargoes. Elliptic estimated that around 4% of Iran’s total oil exports in 2020 could come from Bitcoin mining. However, it remains questionable whether the use of Bitcoin to circumvent sanctions can be implemented sensibly.
Should you wish, Russia has the energy resources and the mining power under its control to pursue a similar strategy. According to our research, at the end of December 2021, ~6.8% Of global Bitcoin mining operations were in Russia itself and another ~8.2% Were in Kazakhstan – effectively a Russian client state.
Given the abundance of cheap energy in Russia, the use of mining as an alternative source of income for energy resources is quite a plausible scenario. At current Bitcoin prices of ~[USD]35,000, the combined hashpower of Russia and Kazakhstan will generate an annual income of [USD]1.7Bn — not enough to offset the likely costs of sanctions, but also not nothing and probably enough to make some important deals with willing counterparties.
Is this price weakness an opportunity?
The recent price weakness led to the infamous "death cross" on 2022, which is often interpreted as a negative omen for future price movements. Our analysis shows that these price vulnerabilities related to the "death cross" were usually buying opportunities rather than a point where one could sell, with the median return after the death Cross event being 50% per year after the event.
Interestingly, while the price reaction to the Ukraine crisis was negative, we did not see the intraday lows of [USD]33,000 on the 24th of January 2022.
Bitcoin has been experiencing the perfect price storm recently, but it is worth noting that it is a young asset with a fluid identity and that it is currently dominated by risk speculation. There remains a core group of investors who continue to see the long-term potential of Bitcoin as an inflationary (real) asset, who also see the benefits of a stateless asset and a hedge against monetary policy failure, as evidenced by the continued inflows of funds. Further commodity inflation caused by the Ukraine conflict poses a real dilemma for central bankers, who are trying to maintain stable markets and low unemployment. The fundamentals of Bitcoin have not changed, and overall, we believe that this recent price weakness represents a longer-term opportunity rather than a vanishing point.
- The article was first published * by Coinshares on Medium on Feb 24.
To find out more:- Russia’s invasion of Ukraine: Bitcoin will play a role on both sides
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