Bitcoin prices increase as Russia's invasion of Ukraine highlights some of bitcoin’s advantages
Details emerge on Intel’s new crypto miner
Crypto Narratives Emerge from Russia and Ukraine
Bitcoin prices have increased this week amid the Russian invasion of Ukraine and escalations of western sanctions against Russia. This price action has played out even equity prices have increased modestly.
The decoupling of bitcoin and equity prices during this time of high geopolitical tension has led several media outlets to theorize that the upward price pressure was driven by Russian citizens hoping to avoid sanctions implemented by western governments. In the immediate term, this lacks evidence. The volume of cryptocurrency trading has increased in Russia; however, the level is still much too small to have a significant impact on prices. Since the invasion, the bitcoin / ruble has traded about $62m in volume on the Binance exchange (where the majority of crypto trading in Russia takes place) while the market cap of bitcoin has increased by $75b. These are not comparable numbers.
While Russian demand may not be driving price, the invasion and its fallout has highlighted numerous use cases for cryptocurrencies. These narratives, unique to the cryptocurrency asset class, seem to have dominated price action this week:
Ukraine Accepts Crypto Donations
As Ukraine continues to defend itself against Russia’s invasion, it has sought to raise funds. It has used traditional measures — the government recently issued a 1-year $270m war bond at a yield of 11% — but it has also turned to the crypto community as a source of capital. On Saturday, February 26th, the Ukrainian government posted Bitcoin and Ethereum addresses on its official Twitter account and requested donations. After verifying the veracity of the addresses, the crypto community showed its support. Since the post, the Ukrainian government has received more than 106,00 cryptocurrency donations totaling $56.2m (according to Elliptic). However, donations were not just limited to bitcoin and ether. Donations came in the form of various digital assets including a CryptoPunk NFT worth about $200,000.
This certainly highlights an important use case for the asset class. Individuals all around the world can, in a matter of minutes, send funds directly to support a cause with little to no fees and without any intermediation.
Russians Aren’t Buying Crypto en Masse (Yet)
As mentioned above, the data suggests that Russians are not yet rushing into cryptocurrencies to the degree with which it is reported in the media. However, there are reasons to believe that they could if the current state of war and sanctions persists.
One reason is wealth protection. The ruble has lost ~25% of its value in the last several weeks while bitcoin has been close to flat. With the government losing access to hard cash and the Russian central bank blocked from using its foreign reserves to prop up its currency, there is little reason to believe the ruble will reverse its course. Like citizens of Venezuela and Turkey, Russians may want to reallocate into bitcoin, a truly global asset, to limit their financial exposure to a failing fiat currency.
A second reason is access to Bitcoin’s open payment system. Sanctions on Russian banks will make it difficult for Russians to access the world economy through the ruble. Bitcoin provides them with access to global markets. It also provides constant access to your assets, simply requiring an internet connection. With banks in Russia limiting deposits, and with Russian citizens contemplating leaving the country, this could be a valuable feature.
Sanctioned Russians May Find it Difficult to Use Crypto
Presently, crypto exchanges have not been prohibited from operating in Russia, but the U.S. has sanctioned specific Russian citizens, which the exchanges appear to be complying with. Theoretically, anyone can use the Bitcoin network, but moving fiat to and from the crypto ecosystem most often occurs under the eye of the exchanges. As we have seen in several cases this year, it can be difficult to hide sources of funds in the public blockchain, so using crypto as means of sanction evasion is not as easy as it might seem.
In terms of the relative magnitude of the risk, it is worth noting that the U.S. government does not appear to see crypto as an effective sanctions evasion tool. The Treasury Department’s recently released National Money Laundering Risk Assessment states that “the use of virtual assets for money laundering remains far below that of fiat currency and more traditional methods” (see page 45 of the report linked here). Further, on a webinar Wednesday morning, National Security Council's director of cybersecurity Carole House stated that “The scale that the Russian state would need to successfully circumvent all U.S. and partners’ financial sanctions would almost certainly render cryptocurrency as an ineffective primary tool for the state.”
This likely isn’t the last we’ve heard on the matter of crypto and sanctions, however. We will keep an eye on any developments as they arise.
Specifications of New Intel Miner Revealed (Five Months Ago)
Last week we discussed the details of Intel’s underwhelming entry into crypto mining, but this week it was discovered that the details of BMZ2 (Intel’s latest model) were leaked five months ago in an SEC filing by one of Intel’s partners, GRIID Infrastructure. This version, using up only 26.0 joules per terahash per second, ranks much better than the company’s debut effort; it is more efficient than all existing rigs and lags only the upcoming Bitmain Antminer S19 XP.
This could be a serious contender for market share. The mining rig manufacturing space is dominated by a few companies in China that are singularly focused on crypto. Being small fish in the semiconductor pond, and being a concentrated industry with highly variable demand cycles, bitcoin hardware manufacturers lack much control over their supply chains. This has led to high lead times and frequent out-of-stock issues (especially during the COVID-19 supply chain crisis). These manufacturers also frequently change the cost of their machines based on moves in bitcoin prices. And in addition to this variable pricing, importers from the United States, where the plurality of mining takes place, need to pay a 25% tariff. An American-based manufacturer with high brand recognition, better supply chain management, and fixed pricing could make major waves.
Market Update
Bitcoin increased by 9.3% on the week. Equities also gained but to a lesser extent, with the S&P 500 up 2.3% and the Nasdaq Composite rising by 2.1%. Gold increased by 1.1%. Bonds were mixed on the week as Investment Grade Corporate Bonds rose 0.3%, High Yield Corporate Bonds increased by 0.6%, and Long-Term U.S. Treasuries fell -0.1%. Real yields fell and inflation expectations increased.
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