Major Cryptocurrencies Tumble in the Wake of Russia-Ukraine Crisis
Major cryptocurrencies recorded a dip in trading on Wednesday night, hours after Russia’s invasion of Ukraine. Bitcoin traded below $ 35,000 after the United States imposed sanctions on Russia following the latter’s full-scale military assault on Ukraine. Bitcoin has seen its valuation fall by 15 percent in the past 1 week. This is the lowest level in over 2 weeks. Third, the second largest cryptocurrency in market capitalization after Bitcoin, traded at $ 2,475, a 4.1 percent loss. Other leading cryptocurrencies such as XRP and Cardano, also tumbled by 6.9 percent and 4.3 percent, in that order.
Why the Drop?
The drop in value of digital currencies came in the wake of growing geopolitical tension between Russia and Ukraine. Many political analysts see Russia’s full-scale attack by land, air and sea as the culmination of Ukraine’s decision to join the European Union (EU) on 1st January, 2016. Ever since Crimea’s annexation in 2014, the two countries have been embroiled in political tension. Ukraine has also shown a deep interest in joining NATO and this too seems to have ruffled Russia’s feathers. Vladimir Putin, Russia’s president has described this as ruining the country’s “historic future as a nation”.
Faltering Cryptocurrency value
2022 has not been very kind to cryptocurrencies. In January, bitcoin, the leading cryptocurrency based on market capitalization, traded below $ 34,000. This was by far the lowest price in over 6 months. In the first week of February 2022, Bitcoin traded above $ 38,000, before peaking to above $ 40,000 for the better part of the month.
Incidentally, most stablecoins recorded modest gains on a day of escalating political tensions. For instance, the USD Coin traded at $1, a gain of 0.1 per cent. Based on data from Coinmarketcap. Other stablecoins that recorded gains include Liquidity USD and Fei USD at 1.4 per dent and 1.2 per cent, in that order. This could be an indicator of the high volatility of cryptocurrencies in comparison with stablecoins. However, unlike cryptocurrencies, stablecoins have a limited supply.
What this means for investors
Investors have sounded a warning that it could take a while before bitcoin goes back to its historical high value of $ 68,000 recorded in November 2021. Du Jun, a crypto analyst and co-founder of Huobi, a cryptocurrency exchange based in Seychelles, predicts a bullish bitcoin market by the end of 2024. This will coincide with the next “halving” event of the cryptocurrency.
A key takeaway from the Ukraine conflict is that cryptocurrency and the stock market may, after all, share a closer relationship than we previously imagined. To put this into context, stock markets globally took a swing following Russia’s attack on Ukraine. At the same time, oil price per barrel hit the $100 mark for the first time in as many months.
Gold has also remained relatively stable amidst the ongoing crisis, perhaps a clear sign why uneasy investors have historically been seen to favor gold as a stable asset during times of war and precariousness.
The Algorithmic Trading Effect
Less than 24 hours after the invasion, the global crypto market lost an estimated $150 billion, which equates to 8 percent of its total value. The drop could be attributed to what Sam Bankman-Fried, the CEO and founder of FTX, a leading cryptocurrency exchange has described as algorithmic trading. These are predetermined instructions which dictate the direction of cryptocurrencies going by data on recent activity. Therefore, a 1 percent drop in S&P 500 triggers a 4 percent loss in the value of cryptocurrency. This is likely to cause a push and pull effect whereby algorithmic investors sell while fundamental investors buy. Bankman further notes that “.. on net; BTC ends up halfway in between m, down 8% on the day.”
Faced with the ongoing crisis, gold seems to have recaptured its reputation as a safe haven while Bitcoin’s dip in value could be indicative of its fading luster.
