ROLE OF DIGITAL TOKENS AS SAFE HAVEN FACES TEST
War in Ukraine sparks debate over whether bitcoin and its peers can be cushion for investors in volatile times or are used to skirt sanctions
The sustainability of cryptocurrencies as a refuge is already facing a test after the digital alternatives to fiat were championed in the wake of Russia’s attack on Ukraine.
After surging by as much as 20 per cent at the start of last week and briefly topping US$45,000 on speculation that sanctions and a collapsing rouble would drive Russians into cryptocurrencies such as bitcoin, the original digital token had reverted to acting like just another risk asset by the end of the week.
Bitcoin was born in the wake of the global financial crisis as an alternative currency outside the traditional monetary system. Since that time, it has been promoted as a means of exchange and a store of value that is detached from governmental control. Such uses had become secondary as speculation took over as the main use until the war renewed the haven discussion.
“It’s a monetary asset that you can bring with you and not be subject to the banking system,” said Jeremy Schwartz, global chief investment officer at WisdomTree Investments.
“A lot of what’s happening in Russia I think helps illustrate for people the value of bitcoin.”
Schwartz said that while many investors still saw cryptocurrency as a speculative asset, the actions of the past week “make you think that there’s a big part of the population that would like to have a place to store their cash and take it with them if they need it”.
The brief rally also renewed the debate around whether cryptocurrencies would be used to skirt the sanctions US and Nato allies put on Russia. Even politicians voiced that concern, with Massachusetts Senator Elizabeth Warren saying cryptocurrency was “a shadow world” that Russians and other countries could use to help “sanction-proof” themselves.
FTX chief executive Sam Bankman-Fried and Brett Harrison, who is president of the exchange’s American arm, wrote in a blog post that it was not that easy to use cryptocurrency to circumnavigate sanctions.
“The world’s attention on Russia’s aggressive conflict with Ukraine, combined with the new omnipresence of cryptocurrencies, has created the natural question now being asked in all major media: can cryptocurrency be used by sanctioned parties to avoid US sanctions?” they said. “The short answer is no.”
The data seems to bear this out, too. Rouble-denominated cryptocurrency activity was just US$34.1 million on March 3, according to Chainalysis. That is down significantly from a recent peak at US$70.7 million on February 24 and the US$158 million record in May 2021.
A more heartening development that emerged had to do with the donations that poured into Ukraine via cryptocurrency.
Alex Bornyakov, Ukraine’s deputy minister of digital transformation, said last Friday about US$50 million had been raised that way and the nation expected the amount to double in a matter of days. An analysis by Josh Olszewicz at Valkyrie showed the inflows included donations via bitcoin, Ether, Polkadot, Solana, Dogecoin and others.
While bitcoin for part of the week decoupled briefly from its usual act of mirroring stocks, some suggested that trend might not last. Michael Novogratz of Galaxy Digital Holdings cautioned against assuming that the digital token was becoming an uncorrelated asset.
David Duong, head of institutional research at Coinbase Global, agreed.
“It’s tough to sustain the current divergence in performance between cryptocurrency and other risk assets in light of the shock to the global financial system more broadly,” he said.
Duong partly credited the recent cryptocurrency rally to technical factors.
“The invasion of Ukraine forced markets to liquidate heavily at the end of last month,” he wrote in a note. “Among other factors, positioning has helped cryptocurrency markets retrace, but we think they remain in an unstable equilibrium.”
Steve Sosnick, chief strategist at Interactive Brokers, said for a brief while bitcoin had appeared to break from its recent tendency to move in the same fashion as technology stocks – but that was fading. It would have been a solid hedge for someone who held it before the rouble’s collapse, “but now it is too valuable and volatile in rouble terms to use it as a means of exchange”, he said.
“Bearing in mind that cryptocurrency has not been around long enough to be truly tested in times of crisis, it is important to remember that even gold does not always rally during a financial crisis,” Sosnick said.
“Also remember that a hedge does not have to rally. It just needs to hold its value. In that sense, bitcoin has done OK.”
It’s a monetary asset that you can bring with you and not be subject to the banking system
JEREMY SCHWARTZ, WISDOM TREE