Written by Monica Vierveijzer 3 months ago

How the Russia-Ukraine crisis affects the cryptocurrency market

With the escalating conflict between Russia and Ukraine, the price of Bitcoin dropped by over €6000 in just one week. Other cryptocurrencies like Ethereum also saw large declines, especially on Tuesday after the Russian president, Vladimir Putin, recognized two pro-Russian regions in Ukraine as independent and announced a, in his words, peace mission. The European Union, United States and the United Kingdom said they will impose sanctions soon.

In this article, we want to explore what a full-on crisis could possibly mean for crypto in both the short and long term.

A safe haven

Markets don't like uncertainty. Once there is uncertainty, investors tend to invest their money into safe havens. Many argue that at least some cryptocurrencies could be considered a safe haven during geopolitical conflicts or uncertain times. A safe haven asset is an asset that investors consider less risky and typically see an increase when traders are fearful or in doubt. Markets tend to recover quickly once uncertainty has passed and certainty arrived, whether that be good or bad news.

During the global pandemic, which caused a lot of uncertainty, both crypto and stock markets boomed and Bitcoin did align with the price of gold for quite a while. The comparison with gold is very important because it is considered a safe haven asset. If we look at geopolitical crises: in January 2020, when the United States announced that they had killed a top Iranian general, the Bitcoin price jumped by 10%. The death of the general sparked fears that the conflict between the US and Iran could escalate into a full war. Historically speaking, inflation is often a consequence of (major) wars. The fact that the Bitcoin price increased, underscored for many analysts that BTC is seen by the markets as a hedge against inflation.

But while gold just reached its highest price since last June, Bitcoin and many other cryptos keep dipping during the recent Ukraine tensions. Of course, the price of crypto is influenced by many different factors, but one can’t ignore these developments.

Be your own bank

If all goes horribly south, governments may decide to freeze your bank accounts or opt for a mandatory stock market shutdown. Blockchains cannot be stopped by a single government and thus access to your money and the markets cannot be completely cut off.

Of course, this is a very dark scenario and it is highly unlikely that a developed country will cancel all access to banks and stock markets, but having access to cryptocurrency could be seen as a contingency plan. And with this in mind, people might just turn to crypto during a potential war.

A long term plan

Cryptocurrencies are still highly volatile and unpredictable. So, it remains to be seen whether or not cryptocurrencies will be used as a safe haven and how, or if, the Ukraine crisis will affect the markets.

Worst case scenario, crypto keeps dropping and we enter a crypto winter that could last months or even years. But if you are into crypto for the long term, you probably don’t have to worry. Keep in mind that most cryptocurrencies are still trading higher than a year ago (when the pandemic was wreaking way more havoc). And even if you bought at a higher price level than we are now, remember that a loss is only a loss if you sold. Unrealized losses could very well turn into unrealized gains one day. But only if you have diamond hands.

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