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Last week, Russian President Vladimir Putin announced Russian troops were invading Ukraine after weeks of speculation from U.S. intelligence. With a kinetic war in the Ukraine, economic and trade sanctions against Russia, and near-term uncertainty everywhere, markets all over went “risk-off,” selling down stocks and crypto while bonds, gold (periodically), and oil traded up.
Russian stocks, Bitcoin, and the S&P500 have been correlated since the beginning of 2022. Source: Bloomberg
Partially responsible for the economic downturn is the fact that Western nations have issued economic penalties on Russia in response to their aggression. The severity of the sanctions is the first of its kind for such a large country. Similar restrictions in the past have been applied to hostile regimes like Cuba, Iran, and Afghanistan, but never to a country with such a global presence, especially in the European economy. The sanctions include:
- A partial SWIFT ban for some Russian lenders—SWIFT is the global messaging service that facilitates cross-border transactions for 11,000+ banking institutions across 200+ countries. A banning from SWIFT essentially removes Russia from the international banking economy and has led to plummeting prices in the Ruble and Russian bank stocks. An informative thread on SWIFT can be found
- Freezing specific Russian oligarch’s assets:—which is intended to apply pressure on ultra-wealthy Russians in the hopes that they push back against Putin’s actions. As of 2/28/22, two Russian billionaires are already publicly advocating for peace.
- Central bank freeze— arguably the most damaging and has never happened to a G20 central bank before. The central bank of Russia won’t be able to access its reserves abroad, severely limiting its ability to weather the other sanctions in place.
Even with the gravity of war sinking in, both Russia and Ukraine found time to announce crypto-related policies last month. Russian regulators have clashed with Russian banks on how to best regulate cryptocurrencies, while Ukraine's parliament has approved a bill to legalize Bitcoin. Due to the sanctions put in place on Russia, the Russian ruble has plummeting in value relative to other monies, leading many Russians to turn to Bitcoin to salvage their savings. Crypto exchange volumes as well as the BTC/RBL price reached all-time highs last week as many had nowhere else to turn to protect their wealth. (Let that last sentence sink in…)
Additionally, the official Twitter handle of the Ukranian government announced it’s accepting bitcoin and ether donations. So far, ~$20 million plus ~$2 million rom NFT Sales (UkraineDAO) have been raised in support of Ukraine. The wallets are still active and donations can still be made as of 3/1/22.
Bitcoin traded at a 6% premium on Binance’s Ukrainian hryvnia (UAH) market immediately following Russia’s invasion. Demand surged as local Ukrainian currency markets were hit with significant disruptions including the Ukrainian central bank, temporarily halting foreign currency withdrawals. Bitcoin’s non-sovereign, apolitical value proposition is on full display this year following the Canadian truckers’ protest and now with financial disruptions as a part of the Russian-Ukrainian conflict.
Not to be outdone in all this, China continued its crackdown on crypto by increasing fines and jail time for transacting in cryptocurrencies. The waterfall of negative news for the market has certainly left its mark on the crypto sector. Crypto markets have been hit hard since their tops in Q4 2021 with nearly all down 50% from all-time highs.
Additionally, 30%+ of all BTC positions are now at a loss compared to ~25% during the summer 2021 pullback, according to Glassnode.
Source: Delphi Digital
Don’t forget the Fed
This Russian-Ukraine war has certainly grabbed the media spotlight, but another critical market-moving entity is also taking center stage this month—the U.S. Frederal Reserve. Since Q4 2021, the overall market expectations surrounding Fed interest rate hikes for 2022 has increased from two to six, mostly due to 40-year-high inflation numbers. Prior to the war, there was market consensus of a Fed hike this March—either a 25 or 50 basis point rate hike. Now with the uncertainty that war brings, the appetite for rate hikes is waning. Market expectations have plateaued at six hikes with some speculation of a softer stance if the war drags out.
Additionally, the U.S. yield curve (the difference in the 10-year treasury yield and the two-year treasury yield) “flattened” to 40 basis points (bps) in February, its lowest level since summer 2020. A negative or inverted yield curve is typically an indicator of a recession while a positive yield curve signifies a stronger market. While the curve has not inverted, it has been flattening rapidly since Q3 2021, suggesting a potential economic slowdown. The relationship between BTC and the yield curve can be seen below, exhibiting positive correlation over the years.
