Into Crypto’s Fear & Greed
Plus: The role of censorship resistance in economic sanctions
This week we cover the wild swings crypto has had in light of Russia’s invasion of Ukraine. Specifically, we highlight the eye-popping amounts of volume being traded and the quick pivot from panic to greed that markets took.
Moreover, we assess crypto’s censorship-resistance and how it is playing a role globally following Canada freezing protestors’ assets and Russia’s economic sanctions.
Weekly Fees — Sum of total fees spent to use a particular blockchain in a week. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin weekly fees dropped to their lowest since 2020
- Ethereum’s network fees remained relatively high around $160M
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges over the past seven days. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
- Over half a billion worth of Bitcoin left centralized exchanges
- Ethereum’s recorded net inflows of $250M, a significant decrease from over $1B inflows the prior week
A Tale of Fear & Greed
People have faced strong emotional swings as geopolitical conflict escalated this week. This led to a down-turn in stocks and crypto while the US dollar gained value relative to other currencies.
Increasing correlations — After declining throughout early February, correlations between stock indices and Bitcoin climbed following the situation in Ukraine
- We have previously covered how risk-off events like these tend to cause panic for stock and crypto investors alike
- This time the dollar (DXY) jumped to the highest since the Summer of 2020, driving leading to strong negative correlations vs Bitcoin
As volatility grew, crypto markets traded hundreds of billions within a day, just for Bitcoin perpetual swaps.
3 Month High — Trading volume for Bitcoin perpetual swaps reached a 3-month high of over $130 billion on Thursday
- Trading activity accelerated in the evening (US time) as the invasion and bombing of Ukraine began
- Wednesday night and Thursday afternoon showed a stark contrast in trader sentiment
Panic hit first — Fears of a deeper war reigned over night, leading to most trades on Bitcoin being realized by sellers’ market orders
- The Trades per Side indicator shows the volume market orders take on the buy-side and sell-side
- Market takers show greater urgency (and pay higher fees) for buying at the ask price or selling to the bid
- In this case, sell orders quickly spiked around 10PM (EST) as the invasion began
- This highlights the fear of crypto participants at the time where the vast majority of volume originated from market sell-orders
However, the picture flipped completely as American stock markets opened
Sanctions but not War — Many feared the worst with a potential escalation of conflict from western countries, but they decided to not send troops into Ukraine
- Markets rallied strongly with Bitcoin reversing a 8% drop into a 3% gain during Thursday
- Buy orders took over as momentum shifted quickly
- Traders took it to Twitter to brag how they timed the bottom, buying the fear
This highlights a stark contrast taking place between markets and the war in Ukraine. Overall, it shows that though fear briefly took over, greed still dominates market participants’ emotions.
Censorship Resistance Goes Both Ways
Last week we saw the Canadian government freeze bank accounts belonging to protesting truckers and people funding them. Trudeau’s emergency act went as far seizing crypto held by centralized exchanges and warned them not to promote self-custodial wallets.
Not your keys not your crypto — the old crypto adage became more apparent than ever after what is likely the first Western government attempt to seize citizen’s crypto-assets.
- Canada was able to freeze assets in at least 34 wallets, with some sources pointing to hundreds of addresses
- Crypto’s censorship-resistant properties are only prevalent if people hold their own assets
- Many pointed to the importance of crypto as Canada’s government overstepped into people’s personal finances
Russian sanctions and crypto — following the invasion of Ukraine, the US and several European governments imposed sanctions on Russia. Speculation quickly emerged on Russia using crypto to evade these sanctions. This raises a complex dynamic:
- First, it is evident that censorship-resistance goes both ways: it does not apply only to a select group of people
- If Russia and its allies were to use crypto through non-custodial wallets, they may be able to bypass the sanctions and alleviate some of their economic costs
- However, if a western government were to identify this pattern, it may lead to the politicization of crypto and potentially even moves to restrict its usage, dropping its price and further damaging sanctioned Russians
- Therefore, Russia is unlikely to state any use of crypto
Previous sanctions on Russia cost them an estimated $50 billion per year and the severity of the recent ones is significantly greater. While personally not in favor of sanction evasion as a use-case for crypto, it is likely we will witness this over the coming years with crypto’s growing geopolitical importance.
