Evaluating the Crypto Market
Around 2-3 years ago, Fed Chair Jerome Powell said we were so far from normalized interest rates that we were not even thinking about normalized interest rates. Essentially, he put a floor under the market and said the Fed had everyone’s back. He maintained this promise through quantitative easing and keeping the Federal Funds Rate (and thus the interest rate) low. Early March, he began to change his dialogue. Under the pressures of rampant inflation, Powell said we were behind the curve, and needed to shoot the interest rate up. What started at 25 basis points in Mid-March has now led into a new proposal of two 50 basis points increases. The Russian invasion of Ukraine exacerbated inflationary pressure through impacting two big futures markets: 1) Russian Oil and 2) Ukrainian Wheat. The resulting consumer nervousness has led to a de-investment of the equity market and investment of long term treasury bonds. More specifically, consumers have been investing in 10-year and 30-year bonds, pushing prices up and yields down to the point they have inverted with 2-year bonds, a common signal of incoming recession. To make matters worse, demand has returned to pre-pandemic levels (aided by governmental stimuli) while the supply line has not, creating an enormous domestic supply crunch. Consumers have become more speculative, sending shockwaves down the line and further hurting the stock market. For crypto, a fall in the stock market is damaging as the crypto market is correlated and more reactive.
If cryptocurrencies were a country, it started the year with a 2.5 trillion dollar economy and projected growth of 58.5% CAGR (Yahoo Finance 2022). Unfortunately, as the stock market falls, crypto does too. Based on current market evaluations, crypto would barely have a 2 trillion dollar economy (Dan 2022). Crypto swings lower during stock falls and higher during stock rises because it is not based on real value. When company’s stocks fall, they begin to lean on physical infrastructure. Unfortunately, crypto does not have this infrastructure to lean on – there is no physical, real value behind it. Since there is no physical value backing the prices of crypto, when speculation hits, it hits hard. Amid the recent declining of stocks, the market cap of crypto decreased 500 trillion USD, bringing the overall size from 2.5 trillion USD to 2 trillion USD (a 20% decrease). Although there has been a significant decline in the crypto market, there is a corner case within the Ukraine and Russian conflict that has created a miniature increase of the market.
Mature markets move in accord to their domestic stocks, and when they drop, citizens are able to hedge the market through other international markets or foreign currencies. When an economy like Russia is getting sanctioned, people have to find a hedge. While this usually means citizens would go to the English market, Nasdaq, NYSE, or buy another currency, those safe havens have been cut off by the economic sanctions imposed on Russia (denying access to other markets and currencies). Looking for an alternative hedge as the Ruble drops, Russians have been loading up on cryptocurrencies. Additionally, Ukraine has been accepting donations in the form of cryptocurrencies to expedite the traditional process. In fact, “the rally for more than 22% in major crypto coins like Bitcoin and Ethereum in the last seven days has aided this narrative [that Russians and Ukranians are turning to crypto]” (Jaiswal 2022). Citizens along with major oligarchs have been turning to these crypto ETFs as a last resort safe-haven for their declining wealth. It has gotten to the point where people are now arguing that crypto is a safe-haven asset equatable to gold.
Although cryptocurrencies are being used as a small scale safe-haven to hedge against the Ruble, it should not become a normalized hedging tool for the average world citizen. In general, safe-haven assets are meant to be predictable and trustworthy – it is a “safe” haven. Cryptocurrencies prove over and over again that they are volatile, speculative, and unable to predict with any high degree of certainty. Cryptos fit under the umbrella of Ponzinomics, “an aggressive investment with relatively high chance of implosion.” As of date, it is even “too early to understand the portfolio characteristics of crypto currencies such as Bitcoin” (Moore 2021). Russian citizens and oligarchs are using crypto as a safe haven because it is their last resort. Ironically, even this corner case is beginning to get undermined.
As the invasion continues, Russian crypto investors learn that some of these digital currencies were not as decentralized as they thought they were. Internally, Putin has limited cryptocurrency transactions and threatened the complete banning of decentralized currencies in order to increase the value of the Ruble (Fabrichnaya and Marrow 2022). Externally, hoping to assist with Russian sanctions, crypto trading platform Coinbase banned 25,000 wallets located in Russia (BBC 2022). Russian citizens using crypto as a safe haven are being hit by both sides, forcing them to learn quickly that crypto currencies are not completely invincible to institutions.
The only Russian citizens seeming to have a completely frictionless path with using crypto as a safe-haven are Russian oligarchs, re-emphasizing the shady roots of decentralized currency. Crypto ETFs are being used by Russian oligarchs to hide money and prevent further capital loss and Putin has turned a blind eye. While terrible, it should not be surprising. Crypto was first used on the Silk Road as a way for criminals to hide transactions of illegal narcotics, services, and information. Now it is being used by an aggressive, war-starting state’s criminal oligarchs as a way to escape the pressure and damages of sanctions. The promise of currency without centralization is an everlasting safety net for those who do want to disobey society’s laws.
While the corner case has shown a small-scale increase in the market for cryptocurrencies, it reaffirms the immoral side of cryptocurrencies and does not remove the fact that the market for crypto is still declining, accelerated by the power of institutions to have some control over “decentralized” currency. Sitting at 2 trillion, it should continue to decrease as the world’s stock markets do (Money Mentor 2022).
Alas, there is some hope for crypto investors. Crypto can theoretically work as a financial safe-haven if a country has rational and moral leaders. Future corner cases can arise with countries housing massive inflation. More specifically, countries such as Lebanon and Venezuela would be more suited than the average country due to their respective 2021 inflation rates of 224% (Mahfouz 2022) and 686% (Yapur 2022). Even then, I would recommend a more stable safe-haven asset such as gold or USD, but there is an argument to be made for crypto as neither governments have made attempts to establish nation-wide crypto restrictions.
Regardless, the overall market for crypto has decreased in parallel with the stock market, but with even more fluctuation due to the volatility of cryptocurrencies. As the year goes on, it will be interesting to see how everything plays out, with my best guess being semi-recessive for cryptocurrencies.
References
2022. “Crypto Platform Blocks Thousands of Russian-Linked Based Wallets.” BBC. https://www.bbc.com/news/technology-60661763.
2022. “Is Bitcoin Crash Coming?” Money Mentor. https://www.thetimes.co.uk/money-mentor/article/is-bitcoin-crash-coming/.
B, Dan. 2022. “Crypto Market Cap Regained 2 Trillion.” NewsBTC. https://bit.ly/3x1umsZ.
Fabrichnaya, Elena and Marrow, Alexander. “Russian Central Bank Proposes Banning Cryptocurrencies.” Reuters. https://reut.rs/35AtUGT.
Jaiswal, Sweta. 2022. “Cryptocurrency ETFs Rally Amid Russia.” Yahoo Finance.https://finance.yahoo.com/news/cryptocurrency-etfs-rally-amid-russia-012301505.html.
Mahfouz, Abbas. 2022. “Record Year-On-Year Inflation.” L’Orient Today.https://bit.ly/3Jaik30.
Research and Markets. 2022. “Global Cryptocurrency Market Report.” Yahoo Finance. https://finance.yahoo.com/news/global-cryptocurrency-market-report-2022-120800380.html.
Yabur, Sarah. 2022. “Venezuela Breaks One of World’s Longest Hyperinflation Bouts.” Bloomberg. https://bloom.bg/36LPnNT.