I know that it may seem frivolous to talk about cryptocurrencies in the context of a war that began just a few days ago, and whose end today remains a great unknown. However, it is interesting to contrast the theoretical models that we have been able to read in recent years regarding the value that cryptocurrencies would charge in the face of hypothetical war conflicts, with the response that Bitcoin and company have given to the reality of weapons in Ukraine.
I say this because I remember reading recently that cryptocurrencies, in a situation as complex as a war, arethey were more efficient than fiat money (the one we normally use), thanks to its decentralized and 100% digital natures. And this point of view, at a first analysis, seems sensible, since the operations could not be altered (at least in principle) by the interference of the parties involved, either directly or indirectly, and despite the fact that the local economy of the countries involved is obviously resentful, with their currencies experiencing a significant devaluation, cryptocurrencies should not be affected, as they are global.
In other words, given the war between Russia and Ukraine, it does not seem like a very sensible time to invest in the Russian ruble or the Ukrainian hryvnia, a problem that, at least in theory, should not affect cryptocurrencies.
And that’s not to mention that, given the blockade that, at least in theory, is going to be imposed on Russia in terms of international operations, cryptocurrencies would be left out of it, since they are not controlled by the institutions that have established such blocks. Thus, again at least in theory, Bitcoin, Ethereum and others would be in these circumstances the most effective way to issue international payments to and from Russia.
Thus, and raised in a very crude way, under these postulates the war could have been the great opportunity for cryptocurrencies to prove their worth against fiat money.
And yet the price of Bitcoin has fallen as a result of the start of the war.
Why?
Why have cryptocurrencies fallen?
It goes without saying that the explanation, like almost everything in economics, is due or may be due to so many factors that it is easy to miss any of them. And I’ve always thought that this is the main reason why economists are as solvent when explaining what has already happened, as they are unreliable when they predict what is going to happen.
However, there are two points, which personally seem to me to be key when trying to understand the reason why the war in Ukraine has had, as a consequence, the drop in the price of cryptocurrencies: fear and traceability.
The war in Ukraine has very severe implications that affect the entire old continent, economic implications that, once again, return to cast shadows on a global economy thatue is still finishing to recover from the blow that the pandemic has caused and continues to suppose. The globality of the markets opened lower after the conflict broke out, and the risk that it will directly affect the supply of energy to Europe further extends the fear.
And how do investors usually react to risky situations? Always adopting the most conservative profile possible, with investments of very low or even zero profitability (see the investment in German debt), but that offer levels of security well above the average. These are not times to win, but to avoid losing, waiting for the arrival of better times, in which to invest again with more joy.
AND this is where the volatility of cryptocurrencies comes in. If even in periods and contexts of economic stability and growth, there are many investors who do not fully trust them (something normal, after seeing the way in which their prices fluctuate), in “times of war”, no it seems excessively sensible to bet on an electronic good and that it has no more value than what its users grant it (and yes, I know that the gold standard no longer exists and that, therefore, the same can be argued with respect to fiat money , with the difference that it is backed by institutions).
And then there is, of course, traceability, which completely breaks the idea that, in the face of the economic blockade of Russia, cryptocurrencies allow the embargo to be bypassed and to operate freely with the country. It may seem like first grade to have to remember this, but an economic blockade is an intentional measure, and it is not just about saying “You can’t operate like this”. No, an embargo of this type entails the commitment of the parties that sign it do not allow the block established by the same to be violated.
In other words, in this case the blockade is not intended to prevent Russia from trading abroad using the usual banking channels. No, it intends to prevent Russia from trading abroad, in any way. And what is happening with cryptocurrencies? well what blockchains are publicso that anyone can analyze the operations, until finding the origin and destination of many of them.
Thus, if a company from the environment in which the economic blockade against Russia has been established carries out any operation with the sanctioned country, and its associated economic transaction is carried out through cryptocurrencies, sooner or later this information will come to lightand the parties involved outside of Russia will have to face the consequences of having bypassed an international blockade, which does not seem like a very pleasant prospect.
To this, we must also add the enormous inconsistency of the blockade itself. As we told you on Friday, the organization of the MWC 2022 has vetoed the Russian pavilion, as well as some companies from that country. In other words, the rest of the Russian companies will be able to participate in the fair and, therefore, carry out commercial activities.
On the other hand, the international community with Biden at the head point out that the economic blockade does not affect the payments that Russia receives for its energy supplies to Europe. It is becoming more and more evident that we are heading towards a soft blockade, in which fiat money will continue to cross the borders of Russiaand therefore will not make cryptocurrencies the only option for trading with Russia.
In the coming days it is possible that Europe will intensify its sanctions against Russia, and that it will take the step of expelling the country from SWIFT, imposing a much tougher blockade. Maybe then the cryptocurrencies will reverse their trend and trade higher? I find it hard to believe, because the risks that I mentioned earlier when talking about traceability will still be there, and also the global economy could suffer even more, thus moving cryptocurrencies away from the list of recommended options for even more investors.
