Ukraine Crisis Triggered a Massive Shift in Fundamentals for Bitcoin
While Geopolitical Relations Crumble, Bitcoin’s Fundamentals Grow
Macroeconomic Trend Leading Up To The Invasion of Ukraine
In January, rumors and speculation of upcoming interest rate hikes and the tapering of bond purchases by the Federal Reserve stirred the markets. The crypto markets along with the rest of the markets turned bearish, as this would mark the first time in three years the FED raised rates, after the largest period of spending in history. A reversal in the Federal Reserve’s policy, from expansionary to contractionary, would see liquidity drained from markets, risk mitigation, and asset sell-offs in juxtaposition with servicing of debt.
Ahead of the Federal Reserve’s monthly meeting on Jan. 26th, Roberto Perli, chief economist at Cornerstone Macro and former Fed staffer said regarding rate-hikes that “The consensus is that the time has come to move, The debate is over how fast”. By the time the Fed meeting rolled around on Jan.26th , and board members first confirmed the possibility of interest rate hikes in March, bitcoin had already broken 40k support and formed a new relative low as it descended from the all time high.
The subsequent day after the 26th, leaks emerged from the White House reporting that, “The Biden administration is preparing to release an executive action that will task federal agencies with regulating digital assets such as Bitcoin and other cryptocurrencies as a matter of national security”.
Interesting. As inflation was nearing an alarming level that even printer-happy economists were uncomfortable with, suddenly the government saw decentralized, deflationary currency as a “national security risk”.
Crypto, National Security Threat?
Maybe there is some truth in that, if your view of national security is clinging to an empire’s outdated method of control and refusing to address the problems inherent to your monetary system that you impose on the rest of the world.
One could easily argue that Crypto’s success is a symptom of the national security threat of irresponsible and reckless spending/printing, let alone the very structure of the system the Fed operates within, or more appropriately, is in charge of. Has anybody considered by now... maybe Ron Paul was right? Maybe the Fed isn't, and never was in the best interest of the nation’s population. Perhaps that's why the founding fathers had so many various quotes warning of such an institution.
Billionaire hedge fund manager Ray Dalio recently released a short documentary based on his recent book titled, “The Changing World Order: Why Nations Succeed and Fail”. In his documentary, Dalio paints the strength of a country’s currency, as a reserve currency used by foreign parties in international trade, as the final building block of an empire, and a key measure of an Empire’s strength. This shouldn’t surprise anybody who understands the role that reserve currency status has for a nation in international trade, and the power that comes with such an advantage. In the video, he states the following:
“So how am I measuring an empire’s power? In this study I used eight metrics. Each country’s measure of total power is derived by averaging them together. They are education, inventiveness and technology development, competitiveness in global markets, economic output, share of world trade, military strength, the power of their financial center for capital markets, and the strength of their currency as a reserve currency. Because these powers are measurable we can see how strong each country is now was in the past and whether they’re rising or declining by examining the sequences from many countries we can see how a typical cycle transpires.”
We can simplify it a bit to focus on the pattern of cause-effect relationships that drive the rise and decline of a typical empire as you can see better education typically leads to increased innovation and technology development and with a lag, [ultimately] the establishment of the currency as a reserve currency.”
He describes a lag relative to the other factors that a currency’s reserve strength interplays with. By lag, the phenomenon can be compared to the light from a star giving delayed information, and just as if something changes in a star’s hemisphere and it takes time to detect that due to the speed of light, it takes time for reserve currency to reflect the macrocosmic changes of an Empire’s structural integrity. Critical as is the light that sheds information on a star, the declining respect for the US dollar as a reserve currency sheds light on the state of the empire — and it’s getting weaker. In his model, his observes that the repetitive pattern of the rise and fall of empires typically has a collision point, compromised of domestic revolutions and foreign wars as a given empire begins to parabolically decline.
Bitcoin’s Reaction to the Invasion
Speaking of revolutions and wars, and tying back to this article’s focal point, since Russia invaded Ukraine on Feb. 24th, Bitcoin has continued to trade within the channel between 45k and 35k. In fact, the day of the invasion, there was a massive amount of buy volume that exceeded the sell volume of the 21st.
From a technical analysis perspective, arguments can be made for both the bearish and bullish side, depending on what time frame one looks at, and what indicators one prioritizes. But this is crypto, and chart movements counter-intuitive to TA happen all the time, whether from market manipulation, or a shift in fundamentals. Technicals matter, but Fundamentals rule. Today we are talking about the latter.
Implications of the Conflict on Federal Reserve Policy
So how has Russia’s invasion of Ukraine shifted the fundamentals of the general market? The day of Russia’s invasion, Goldman Sachs released a statement in which they stated the following:
“The combination of upside inflation risk and downside growth risk has mixed implications for monetary policy. Historically, Fed officials have sometimes preferred to delay major policy decisions until uncertainty surrounding geopolitical risks diminished. In some cases, such as after September 11 or during the US-China trade war, the FOMC has cut the funds rate.
The current situation is different from past episodes when geopolitical events led the Fed to delay tightening or ease because inflation risk has created a stronger and more urgent reason for the Fed to tighten today than existed in past episodes”
In essence, Goldman is saying that usually during times of geopolitical turmoil, the Federal Reserve doesn’t make major policy changes, but this situation is particularly bad. Early talks of a .50% rate hike diminished into talks of a 25 point hike. This week Federal Reserve chair Powell told the House Financial Services Committee that the FED will proceed with caution, “Inflation is too high. We understand that. It’s going to take some time, but we’re going to get it back under control.”. However, Powell told the congressmen that the FED will proceed with caution, as Russia’s invasion of Ukraine adds more uncertainty to the economic outlook.
“The economics of these events are highly uncertain, So far, we’ve seen energy prices move up further and those increases will move through the economy and push up headline inflation, and also they’re going to weigh on spending.”
The actual future is ambiguous — the Fed may postpone rate hikes as a global trade war heats up. Former president of the Kansas City Federal Reserve, Hoenig, expressed doubts of follow through in an interview on Monday, saying the following:
“If we go down this path and this economic war continues and unemployment starts to rise, then I think the Fed will hesitate [to continue to raise rates]. That’s been their pattern in the past for some time now and I think that will be a major challenge for them to try and balance the need to get this inflation, which is almost four times higher than their target, under control while not also seeing the economy suffer large increases in unemployment.”
The notorious “inflation hawk” also said that “I think the Fed will attempt to get close to 1%[in rate-hikes] because even with all this going on, they know how far behind they are on the curve of inflation. They have to move this stuff up.” adding that if, “the unemployment rate starts to rise in May or June, I think they will slow that down even more and that’s what gives me some pause, but it’s something they have to deal with, something they brought on themselves because they are so far behind the curve. That’s the challenge they’ve got to weave themselves through.”
In the same interview, while the former regional Fed president thought the Fed would hesitate to raise rates as a result of the economic shocks from the conflict, he predicted that they’ll try to ultimately raise rates by 1%, when right now 0.25% is up in the air because it'll likely shock the economy too much and lead to a cascade reaction as the economy’s lube dries up, and contribute to the the unemployment he fears around the corner of potential rate hikes.
On Sunday, Reuters ran the headline, “Wall St Week Ahead Rate-hike fears abate but Ukraine muddies stock market outlook’. An excerpt reads: “The see-saw moves come as investor hopes that the Fed may raise rates less severely than anticipated vied with worries about inflation and higher commodity prices, stoked by sanctions against Russia, one of the world’s biggest commodity exporters. Investors have virtually priced out the chances of a hefty 50 basis point rate hike in March.”
Seeing a pattern of negative indicators here? One can’t help but laugh at the juxtaposition of fears of higher commodity prices on Sunday, and the record breaking price jump in nickel on Monday. At 55,000 it had increased 90% for the day — the largest single-day jump in history. Then, after American markets closed, it hit over 100,000 in Asian markets — a roughly 400% jump.
Alright, tying back to bitcoin, which is trading sideways in anticipation for what the Fed actually does. Given that there was an expected rate hike in March for months, the market has undoubtedly “priced in” this expectation. If the Fed does stall on rate-hikes, Asset markets will get a boost as anticipated expectations are defied.
Brad Neuman, director of market strategy at Alger, went on record to predict that “The Fed will be less aggressive now that Russia has invaded Ukraine in the near term, but the problem that the Fed faces has not been ameliorated,” Neuman said. “In fact, it has been exacerbated.”
This means that the consequences of the inflation that the Fed(*ahem* created *ahem*) needs to combat has been compounded by supply shocks. This is manifesting in commodity prices already, in Nickel’s case violently. Other metals are also rising, such as tin zinc and copper. Aluminum — used in car bodywork — went to record highs last week. Palladium, used in catalytic converters, has increased 80% this year to record highs. Wheat prices are shooting through the roof, and obviously gas. Nickel likely rose so high relative to other commodities as a response to the skyrocketing gas prices- as nickel is a core ingredient in lithium ion batteries and other tech used by the EV industry. If this conflict does not end, it’s likely just the beginning as shocks ripple through the market.
Surmised by Reuters in their article on Sunday previous sourced, “Investors next week will be watching data on U.S. inflation, due Thursday. Consumer prices in January grew at their fastest pace in nearly four decades.”The article also stated that. “Some investors have been wary of the rebound in stocks. The Wells Fargo Investment Institute is re-evaluating its asset price targets in the wake of the Ukraine turmoil, ‘but we don’t want to over-react when uncertainty is so high,” said Sameer Samana, senior global market strategist at Wells.’ ”
Note: As that quote references the stock market, it is worth pointing out that the turmoil in Ukraine is going to have differences in its mode of impact on various markets. While some companies may be severely hindered by, let’s say rising commodity prices they need to produce a finished product, something like Bitcoin is going to not be affected in that way. Infact, the rising price of oil and natural gas will likely positively impact bitcoin as miners will have to spend more for a given amount of hashpower, and will likely raise the prices they are willing to sell at/reduce the sell pressure as to reflect the change in the cost of operations.
To Recap: the chance of the Fed continuing to delay dealing with inflation is potentially bullish for all markets, and if the upcoming monthly Fed meeting results in just that, markets will likely rise from stocks to crypto. Sometimes it’s sell the rumor, buy the news instead of buy the rumor sell the news. Jokes aside, the shifting macroeconomics of the world right now are extreme. We haven’t even discussed the extreme sanctions imposed on Russia, a completely separate factor to consider, and the primary subject of interest and the reason for this article.
Sanctions on Russia and Threats of Future Sanctions on its Trade Partners Strengthen the Use Case of Bitcoin Massively
The United States along with the EU imposed wide-sweeping sanctions on Russia, even cutting it off from the SWIFT international payment system, which caused the Ruble to immediately plummet 30% the day of. This will change the world economic order massively, and as Ray Dalio might be quick to agree with, (likely the reason he released the documentary 4 days ago),a reflection of a changing world order. Forbes published an article titled “How Cutting Russia From SWIFT Will Change The Financial Landscape”, in which the following statement was published.
“The move to ban Russia from SWIFT will likely hasten in a new era for global monetary flows, one where the ability to use SWIFT to impose economic sanctions with severe consequences may be severely curtailed. An era where at least Russia and China will have fully developed–and most probably interconnected–their own alternative systems. In sum, an era where the idea of one secure, universal messaging system will no longer be viable.
A new era of competing global payment systems?”
SWIFT connects 11,000+ financial institutions in more than 200 different countries and territories. Roughly 40 million messages a day are sent through SWIFT, enabling the exchange of trillions of euros between companies and governments around the world. Forbes describes the importance and scope of the SWIFT system that enables modern commerce:
“Cutting a bank from SWIFT is like cutting a person off from the internet. While monetary flows would be possible in theory, without complementary information (where the money comes from, where it goes, what it is for) a bank would not be able to operate. And, as we have seen with Russia this week, partially or entirely cutting a country’s banks off from SWIFT has serious economic consequences.
This is precisely why it is so important that banks around the world have access to a system that is agnostic, secure and one of which they are a part of no matter what. And for more than four decades, this has largely been the case. Since its initial creation in 1973 and later launch in 1977, SWIFT has held strong as the universal messaging system, ensuring safe, international transactions for any bank across globe.”
So Russia, and all of its trade partners are suddenly in large need of a “agnostic, secure” payment system, “one of which they are a part of no matter what”? Hmm. No one tell bitcoin. Oh, what’s that? This just in(seriously, this just broke last night), via Bloomberg, “Biden to Sign Crypto Order as Firms Face Sanctions Pressure”
“President Joe Biden is set to sign an executive order this week that will outline the U.S. government’s strategy for cryptocurrencies, according to people familiar with the administration’s plans.
The order will direct federal agencies to examine potential regulatory changes, as well as the national security and economic impact of digital assets, said the people, who asked not to be named discussing the deliberations. The White House’s approach to crypto has attracted fresh attention in recent weeks after the U.S. and its allies levied sanctions on Russia, prompting concerns that organizations and individuals could use crypto to evade the restrictions.”
Hours before reports of Biden’s impending executive order, Russel Brand released a brilliant video yesterday in response to growing(as a response to Ukraine crisis) talk throughout the media of crypto-regulation.
Naturally, cryptocurrencies are a way to circumnavigate sanctions, and many, from economists to government employees have been wondering how large of a role they will play in Russia’s response, including that of its trade partners. Likely a significant one. Half the point of them, and the use-case that early adopters and advocators touted, is the idea of a “permissionless blockchain”, that is, an open network available to everyone to participate in the consensus process — fully decentralized.
In an article from 6 days ago titled “Federal Lawmakers Worry Russian Leaders Are Using Crypto To Avoid Sanction”, BuzzFeed reported on pressure applied to the crypto industry to sanction Russia:
So far, the crypto industry has largely ignored or condemned calls to freeze Russian holdings. Changpeng Zhao, founder of the world’s largest crypto exchange Binance, told BBC Radio 4 that the company was “not in a position to sanction, like, populations of people,” and said Binance would only respond to requests regarding specific individuals.
What?!?! Binance won’t assist in siege warfare? They don’t believe in collectively punishing an entire country’s population for the actions of its government(which we declare is not a democracy and they don’t have control over)? Its not as if starving innocent civilians to death in sanctions that target them is essentially the same thing as blowing them up or killing them overtly, is it?! I mean sure, the consequences of general sanctions are predictable, but I mean, you don’t blame the owner of a gun for pulling the trigger in mass murder, right? You are supposed to blame the gun. At least that’s what the TV told me!
Another large exchange, Coinbase, told Motherboard that it will not comply with Ukraine’s request in the interest of “economic freedom.”
India, a growing economic superpower that shares many traits in Dalio’s model of an empire on the rise, is a neutral party relative to the US and Russia having decent relations with both and being major trade partners with both. However, just this week, the Biden administration threatened the country with sanctions, for trading with Russia and for abstaining in a UN vote regarding Ukraine. A senior US diplomat was quoted on record saying that the Biden administration hopes ‘India will find it’s now time to further distance itself’ from Russia. Objectively, that is the US threatening India with economic warfare if it does not blindly obey like a dog to a master, and work against its valuable trade partner, or cut economic ties with it at Master Uncle Sam’s order. And this level + abuse of control the US seeks to impose on the rest of the world, is exactly why the world seeks, and arguably needs, a new world order.
According to Ray Dalio’s model, which is drawn upon and reflective of reality, the fall of the world’s primary empire, if that is what we are witnessing, is coinciding with the rise of a new world order. As the fall of the world economic order ensues, a new economic world order will come about. The question is, what type of order is that? Will we see Russia and China work together, will they simply create a parallel system, near-identical in design to the foundation and logistics of SWIFT? Perhaps, to conduct transactions with fiat currencies. Or will they create a new version of what SWIFT was supposed to be, an open payment network for the world, but do it on the backbone of a public blockchain they design to decentralize the system? That may be reinventing the wheel(fiat-pegged assets exist on existing blockchains), but could happen for nuanced reasons.
Even if Russia and China make their own version of SWIFT, keep it centralized, then crypto(namely bitcoin) will likely still begin to assume a role in international trade, especially if parties don’t want to be overtly associated with Russia or a blacklisted party as crypto will likely retain the advantage of privacy, not mention their permisionless nature from being decentralized, unless Russia and its trade network does utilize blockchain in its SWIFT alternative. .
This isn’t to mention Bitcoin’s inherent superiority over fiat currency as a foreign reserve in regards to wealth retention and appreciation due its deflationary model in contrast to fiat’s perpetual inflationary model that always(always) ends in complete destruction of the currency through constant debasement. Privacy coins such as Monero and Zecash are something to strongly consider and watch particularly in the wake of sanctions.
New World Power, or a True New World Order?
Now I keep using that phrase, “new world order”, That Ray Dalio uses to describe a new empire emerging from the fall of the old one. But I am not using it with the connotation of the infamous NWO, but rather to draw contrast to it. Perhaps the actual new world order emerging will ultimately be the opposite of the agenda most people think of when they consider the infamous term, “New World Order”.
Infact, one could extrapolate to view the cyclical pattern of the rise and fall of Empires, as accurately observed/described by Dalio, itself as an empire, or rather, order, unto itself to eventually fall on a macrocosm. As Above, So Below. Being that the fall of empires nearly always end with debt crises, debasement/devaluation of an empires currency, and the diminishing role of its currency as a reserve currency, perhaps one could argue that any empire seeking to steal the spotlight and take the old order’s place is doomed to fail by repeating a model that always ends in failure, as predicated by history.
Just as markets have short term bull/bear cycles embedded within macrocycles that occur over longer timeframes, perhaps it’s not time for a new world order to take the stage of the US and repeat the entire cycle again, but rather perhaps it’s time for a new world order to begin to diverge from the cycle and follow a new model. Perhaps this meta cycle can be seen as the rise, peak, and fall of centralization — as large scale decentralized systems, made possible by the recent technological boom of the last century, begin to replace and make obsolete the traditional systems of the past.
The power in the world in meta analysis has quite clearly become more centralized than ever in history under the US empire given the rapid advancements in technology since world war 1 and 2, the increased level of control governments have gradually seized(from income tax creation in 1913, normalization of militarized surveillance police states capable mind-boggling levels of control, to countless other developments whose effects ultimately shape so much of our lives.
Just as Ray Dalio describes the clashes that occur between declining empires/world orders and those on the rise that will replace the old, there can be interpreted a battle between the “New World Order” agenda, ultimately a highly centralized one world government, and a decentralized network of people and organizations seeking to (surprise) decentralize power, and reverse the trend towards centralization, even change the very root dynamics underpinning society.
Just as social media, decentralized information flow, has been threatening the “empire of lies” as Putin called it last week, crypto seeks to decentralize money flow and threaten the current economic system — which clearly works wonders and deserves to remain in place. Just as the world oligarchies have pushed back on social media by seeking to regulate it and re-centralize through censorship, fact checkers, algorithmic manipulation and control — governments seek to crack down on the crypto industry, they’ve had enough. Like social media, the paradigm of power and control that currently operates seeks to co-opt the industry, and transmutate the potential tool for decentralizationl into a form of control and surveillance. Fortunately for social media, blockchain is helping take that to the next level as well and make another push to towards decentralizing society with the rise of web 3.0 and permissionless blockchain based platforms.
On the social media note, this article will be posted on the Hive Blockchain, a Steemit fork originally centered around blogging and publishing, turned competitor to Ethereum with its own thriving ecosystem as it is smart contract capable in the same language with the same capabilities, more scalable, and highly cheap to use- data loads that costs thousands to send over Ethereum costs pennies for hive (and other, newer generation layer 1 blockchains.) I will also post about it on Somee.Social (a web 3.0 social media platform that offers easy-access and barrier of entry, one doesn’t have to use the blockchain components of it if one doesn't want to) along with utilizing Minds.com (another great blockchain utilizing social media platform).
There is a clear emerging trend of the decentralization of systems among Earth’s population as technology allows for it, its partially why social media blew up at the speed it did, decentralizing the flow of information, and this is illustrated by the rapid emergence and expansion of blockchain based ecosystems as well. These trends are evident of a deep-seated desire for change in how the systems of our society operate. If this new trend is to continue, we will see continued decentralization of traditionally centralized systems of society. Decentralized Autonomous Organizations, or DAO’s, are a glimpse at how governance of society can be revolutionized. Perhaps we should take note of these trends. Perhaps it is time for a new era of humanity.
To Digress and Summarize..
A. The Ukraine/Russia conflict has shifted the short and mid-term fundamentals of bitcoin in that the Federal Reserve will likely be less aggressive in contractionary policy now and possibly even hold off on it all together depending on how things play out.
B. Sanctions and Swift System dissolution highly incentivize bitcoin and crypto usage by central banks and international traders/importers/exporters as a reserve currency, for the short to long term.
C. The American Empire is likely in its death throes, as it desperately seeks to retain dominance. Maybe its time to hedge against US hegemony.
D. There might be a country that continues the micro-cycle described by Dalio that's been repeating since Rome, and takes control as the next superpower — as that would be history repeating itself(no surprise). Or a group of countries might follow through in attempting to create a one world government, what many people think of when confronted with the phrase “New World Order”. But I believe that humanity is at a cross roads as the entire fiat system that dominates the world, a system more centralized yet unstable than any before it, collapses. We will either allow the world’s highly centralized governments to coalesce into a one world government, the New World Order they desire, where they can force and coerce us to “own nothing and be happy”, live in the pods, eat the bugs…or humanity can and will rise up through decentralized, voluntary organization to reclaim its power from those elite and institutions that seek to control and dominate the masses without their consent.
E. Regardless of one’s opinion on my extrapolation of Ray Dalio’s model onto a macrocosm of human history, it should be clear that Bitcoin could and very likely will play a large role in the chaotic disruptions of the world’s economic paradigm.
F.(uck tyranny). The revolution might not be televised, but part of it might be tokenized.
UPDATE: 3/9/2022: Yesterday, the day of this article’s publication, following its release, privacy coins skyrocketed 20+%, largely outperforming the market. This indicates/further validates that sanctions + additional regulation (Biden’s impending executive order) are indeed bullish for crypto — and privacy coins will likely play a role according to market speculators(or state-actor insiders buying up in preparation)
