Crypto in a time of war
March 16th, 2022
March Market Outlook
Bitcoin has now been in existence for over 13 years. Last year it crossed the $1 trillion threshold in market value.
But crypto is still a young and relatively small asset class when measured against equities, bonds, commodities, real estate, and other investable categories. For many such traditional assets, we have a century or more of performance data in various settings like wars, recessions, and heightened inflation.
Now, for the first time, we are now witnessing how bitcoin and crypto will perform in an environment that includes:
- Perhaps the most significant military conflict since the second world war
- Rapidly rising prices, including food and oil
- A Federal Reserve aiming for materially higher interest rates
In our view, nothing in the current environment alters the fact that bitcoin remains the “hardest” asset in history.
Over the course of the 2+ year COVID pandemic, bitcoin has already proven to be an attractive store of value to millions of people. And we expect to see ever more market participants changing their prior negative views on bitcoin.
The Ukraine conflict — coming on top of the still ongoing global pandemic — will also lead to a rise in what was already a world war level of public indebtedness prior to COVID-19.
Unsustainable government debt could trigger a host of financial cataclysms: sovereign debt defaults, currency crises, or other forms of financial instability that highlight bitcoin’s unique characteristics and value.
The weaponization of fiat currencies and the traditional banking system, regardless of the validity or support for such actions, is also likely to trigger a decline in US dollar dominance and lead more governments towards adopting bitcoin.
On top of the case for bitcoin as an inflation and macro hedge, bitcoin (and the rest of crypto/web 3 more generally) is a technology protocol and platform that continues to develop. Notable progress on scalability is being made to enable a wide range of smart contracts, DeFi, DAOs, NFTs, etc.
Bottom line: both the need for bitcoin and visibility on further mainstream adoption for a multitude of use cases has never been stronger.
- Market Movements
- As we are set to publish bitcoin has declined slightly since the start of the conflict in Ukraine while also seeing an increase in its crypto market “dominance” (bitcoin’s total crypto market value share)
- In February crypto rebounded, with Bitcoin (BTC) up +12.2% and Ethereum (ETH) up +8.5%
2. On-Chain Insights
- In February the average number of daily transactions (0.4%) and payments (1.1%) gained slightly over January
- The continuing increase in bitcoin’s estimated hash rate speaks to the medium-term price confidence of bitcoin miners and the availability of economically attractive sources of energy
1. Market Movements
In February crypto rebounded, with Bitcoin (BTC) up +12.2% and Ethereum (ETH) up +8.5% (Table 1). A growing sense that Federal Reserve monetary tightening may not be as aggressive as previously anticipated may have contributed to crypto’s reversal from January.
Table 1: Price Performance: Bitcoin, Ethereum, Gold, US Equities, Long-dated US Treasuries, US dollar
However, US equities did not match crypto’s uptick and were down -3.1% for the month. For the year crypto, equities, and long-dated US bonds are all down. In contrast, traditional safe-haven assets like gold and the US dollar are up for the year.
As the conflict in Ukraine has broken out we are seeing crypto prices diverging on some days from what is happening with the US equities market (tech equities in particular). This divergence provides some support for our view that crypto possesses unique characteristics, including bitcoin’s role as an inflation hedge and the ability of crypto to operate as an alternative “payment rail”, as noted above.
2. On-Chain Activity
In February, all bitcoin on-chain metrics we track showed gains (Table 2).
Table 2: January vs February bitcoin on-chain network activity
The average number of daily transactions (0.4%) and payments (1.1%) saw a slight increase in February. While average daily active addresses followed suit with a 2.8% increase.
Transaction fees gained 1.6% from January through to February, and overall total BTC transactions and payments made using the Blockchain.com platform in February increased 2.5% and 1.3%, respectively compared to January.
3. What we’re reading, hearing, and watching
- @wilxlee: Red Flags on NFT Projects Thread
- Ars Technica: $3.6 billion bitcoin seizure shows how hard it is to launder cryptocurrency
- Bloomberg: After Crypto’s Cold Winter, Expect Springtime for Web 3.0
- Coin Metrics’ State of the Network: Issue 143
- Honestly with Bari Weiss: Former Google CEO on Big Tech, Artificial Intelligence, Bitcoin and the Future
- The Verge: The many escapes of Justin Sun
- We Study Billionaires: Russia Ukraine War & Global Macro Impacts w/ Luke Gromen (Bitcoin Podcast)
- Alt-M: Making Money Myths
- Bloomberg: How the Russia-Ukraine War Will Impact US Dollar Dominance, FX Rates
- NYTimes Larry Summers Shares the Blame for Inflation
- POLITICO: ‘Yes, He Would’: Fiona Hill on Putin and Nukes
- Schneier on Security: Breaking 256-bit Elliptic Curve Encryption with a Quantum Computer
- Stock Market: The Problem with Jon Stewart
- The Rest Is History: Ukraine and Russia
- Wall Street Journal: Fed Staff Reported Securities Trades Amid Bank’s 2020 Stimulus Moves
- Wall Street Journal: Will Inflation Stay High for Decades? One Influential Economist Says Yes
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